Know Risk is a community education program designed by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to improve our understanding of insurance and how it relates to managing the many risks we all face in life.
Directors and officers insurance
Covering yourself not just your business
On the surface, directors and officers insurance (D&O insurance) might seem like something reserved for large, multinational organisations that have multiple directors and officers, making the likelihood of a claim that much greater.
However, in recent years, there has been an increasing demand for D&O insurance from small-to-medium enterprises as claims against company directors and executives rise across businesses of all sizes.
So, given its increase in popularity and its possible relevance to you and your business, let’s have a look at the basics of D&O insurance so you can make a more informed choice about whether it’s a policy you should consider purchasing.
What is D&O insurance?
D&O insurance policies are essentially liability insurance policies that are designed specifically to protect the people who run a company (i.e. directors, officers and managers) against claims made against them in relation to any actions or decisions they take as part of their job responsibilities.
As a director and officer of your own company, a D&O policy provides the peace of mind that if regulatory or legal action is brought against you, your insurance will help fund your legal costs and pay any damages, costs or penalties that are awarded against you.
While it might seem easy to simply dismiss the need for D&O insurance on the basis that you operate a well-regarded and established business and the decisions you make as a director are always carefully considered, don’t discount the notion that even when you have the best intentions, mistakes are still possible (and, in same cases, likely).
The decisions you make as a company director will often be difficult ones that will inevitably at some point adversely affect others. When this happens, having a D&O insurance policy in place can be extremely beneficial.
What and who is covered?
In terms of who is covered, typically, all past, current and future directors and officers of a company will be covered as part of a D&O policy.
In terms of what is covered, as mentioned above, D&O policies are designed to cover the cost of defending a claim as well as any financial losses that result, regardless of whether what is being alleged happened or not.
Some common issues that give rise to such claims against directors and officers include:
- Errors in reporting (for example, misrepresentation or inaccurate disclosure)
- Non-compliance with laws and/or regulations
- Actions of shareholders
- Issues arising from HR and employment practices
- Decisions made by a company director or officer that exceed their particular authority
D&O cover is typically taken out by the company in question and is also paid by the company.
What isn’t covered?
Before you get too comfortable, it is important to note that criminal, intentionally non-compliant and fraudulent acts are not covered by D&O policies. D&O policies will also not provide coverage where a director or officer’s actions were in pursuit of personal profit.
Some other exclusions include claims that are covered by another insurance policy (like a professional indemnity policy), any legal action that had begun prior to the D&O policy’s inception, bodily harm, property damage and claims made under a previous policy.
On the plus side, however, if one of your co-directors’ or officers’ actions were criminal, intentionally non-compliant or fraudulent, but you are innocent of such behaviour, you will still be covered.
Should I get it?
As always, this is, unfortunately, a question we cannot answer for you. The only person who is an expert on your situation is you, and when it comes to your business, only you and your partners can know what is in the company’s best interests.
If D&O insurance strikes you as something that might be remotely relevant to your business, discuss it with your partners and seek the counsel of a trusted business adviser or insurance broker not affiliated with any particular insurance company.
Don’t be afraid to ask as many questions as are required for you to come to a decision that is right for you and your company, and if you do decide to go ahead and purchase a policy, make sure you read the PDS carefully and are aware of all of the policy definitions, exclusions and terms and conditions so there are no surprises if or when you need to make a claim.
For more on directors and officers insurance go here.