Directors, officers and PI insurance

Liabilities
The Directors and Officers of a company are exposed to unlimited personal liabilities arising from actions brought by a number of potential claimants. In an increasingly litigious society, more claims are being brought than ever before, and the trend looks set to continue.

As corporate actions against the controllers of businesses become more frequent, Directors and Officers Insurance is increasingly being seen as a necessary piece of business insurance. Indeed many directors or senior controllers will not accept appointments unless the employer provides robust insurance protection on their behalf.

Who is a director?
All companies have 'appointed' directors whose positions should be fairly obvious to both those within the company and to those who do business with it. Essentially, directors are people described as such in the Company documents. However Section 741(1) of the Companies Act provides a non-exhaustive definition of director, namely: in this Act, 'director' includes any person occupying the position of director by whatever name called. This could include Executive, Non-Executive, Shadow, Associate, Nominee and Alternate Directors

An 'officer' of a company is a little more difficult to identify. All companies have at least one 'appointed' officer (the company secretary). They are likely to have other employees with significant executive responsibilities who, if they are managers, will also be 'officers'

What are a director's or officer's legal obligations?
Directors and officers must comply with a wide range of legislation, including for example the:

• Companies Act
• Consumer Protection Act
• Data Protection Act
• Environmental Protection Act
• Health & Safety at Work Act
• Insolvency Act
• Racial Discrimination Act
• Sex Discrimination Act
• Trade Description Act

Under the Companies Act alone, there are more than 200 offences that may result in action against an individual director or officer.

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Who might issue a claim?
Claims may be received from many sources, including:

• Creditors
• Government
• Insolvency Practitioners
• Investors
• Regulators
• Shareholders

Directors and officers involved in merger, acquisition or divestiture activities also have a considerable risk of litigation from potential buyers, shareholders and regulatory bodies.

How may claims arise?
Areas under which claims may arise vary greatly and can include:

• Breach of authority
• Breach of contract
• Breach of duty
• Breach of trading standards
• Breach of trust
• Conflicts of interest
• Corporate manslaughter
• Imprudent investment decisions
• Libel and slander
• Negligence, error or omission
• Negligent supervision
• Plain error of judgment
• Unauthorised payment
• Wrongful trading

Available cover

Directors and Officers insurance provides indemnity for the legal costs involved in responding to an action and for any awards that may be imposed. Cover is for wrongful acts, defined as breach of duty, breach of trust, neglect, error, mis-statement, misleading statement, omission, or breach of warranty or authority.

The policy defines the insured as any past, present or future director, officer, or equivalent executive manager of the company, as well as any employee while acting in a managerial or supervisory capacity.

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What is covered by a D&O policy?

D&O insurance is generally underwritten on a 'board basis' in that it protects directors and officers of a given company or group of companies. It can usually be extended to embrace associated companies and appointments held by directors or employees in outside companies, e.g. those in which the insured company has an investment or other commercial interest. Cover is also commonly available on a 'blanket basis', embracing all past, present and future directors and officers.

Wrongful acts.
Indemnity is provided to the director for legal liability arising from a 'wrongful act' committed whilst acting as a director. This may be for damages and might include the costs of representation or defence in civil or criminal proceedings or in official investigations into the affairs of the company. 'Wrongful act' is usually defined as "any actual or alleged breach of trust, breach of duty, neglect, error, mis-statement, misleading statement, omission, breach of warranty, of authority or other act wrongfully committed or attempted." Wrongful trading is included.

Company reimbursement.
D&O policies are often split into two sections - the D&O section and the company reimbursement section. It is the company reimbursement section that will respond if, in law, the director is able to look to his company for indemnity.

Legal costs.
Legal costs can be substantial and are normally covered by D&O policies, subject to the insurer's prior consent. They cover the costs of investigation, defence and settlement of claims. These costs might embrace lawyers for investigation and defence, experts and court costs. The costs are normally included within the limit of indemnity, in which case they erode the cover for damages.

If there is an excess on the policy this may or may not apply to legal costs. It is worth noting however that a claimant's legal costs normally form part of the claim against the insured director.

Claims made
Like professional indemnity, medical malpractice and libel insurance, D&O Insurance is underwritten on a 'claims made' basis. This provides cover for claims made (and reported to the insurer) during the period of insurance only. In contrast, other liability covers normally provide indemnity for 'losses occurring' during the policy period. A claim is generally notifiable under a D&O policy when the insured first becomes aware of circumstances that could lead to a claim - this could be anything from an event happening (such as an administrative receivership), to a verbal criticism to receipt of a statement of claim. The interpretation of when this situation occurs can be the source of policy disputes between the insurer and insured.

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None standards but available covers

The Corporate Manslaughter Act 2007

The act came into force in April 2008, and has the effect that an organisation can be held to account for corporate manslaughter if a management or organisational failing causes someone's death. Police investigating any death in the workplace will have to consider the new offence with the Health and Safety Executive. If a prosecution were brought the jury would have to evaluate the corporate 'attitude' to safety in its deliberations. Cover can be extended to cover legal defence costs up to the point that guilt is proven but cannot cover criminal penalties.

Crime Cover

Employee dishonesty or third-party computer funds transfer fraud can cause large losses and can even financially devastate small and medium-sized companies. It is therefore important to protect the company against such losses. In addition, expenses cover is provided for any corporate identity fraud.

For those accused - their liberty is at stake and, financially, the costs of defence can be high; sometimes reaching six-figure sums. Directors could go to prison for their actions, inaction or ignorance. D&O insurance cannot cover the criminal penalties as that is against public policy, but it can cover the costs of defending a claim up until the point that guilt is established.

Entity Coverage. 

Entity cover extends the cover to the company or organization itself which sometime bears the brunt of any awards.

Currently almost all charitable organizations have entity coverage which is why we don't recommend it for such organisations on our "quote and buy facility."

Entity coverage is purchased by charitable organisations and "non profit" associations as well as many "for profit" organizations.

Please note - The inclusion of Entity cover has been questioned of late following certain high profile bankruptcies where the policies have been ceased by the liquidator as part of the corporate assets.  This defeats the original purpose of D&O which was to protect the directors and officers in exchange for them sitting on the board.  Please seek advice before purchasing.

Employment Practice Liability Cover (EPL)

Any employee suing in respect of an alleged employment practice violation is likely to direct the action at the employer who, in most circumstances, will be the company. The employee may, particularly in cases of discrimination, also name individual colleagues, supervisors or directors. As such, it is important to protect both employees and the company. (EPL) can be added, purchased separately or incorporated with D&O. Most D&O policies offer a sub limit but it is not a standard component of D&O. See our section on Employment Practice Liability Insurance.

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The usual exclusions

Professional duty
This affects directors who undertake professional work for the company's clients. The company should get adequate professional indemnity insurance (PI). The exposures from consultancy activities are distinct from those of a director. Often a director will face both. For example a management consultant or company doctor, who may assume the mantle of non-executive director as an extension of his pure consultancy activities. Alternatively a professional firm who act in the form of a limited company rather that as a sole trader or partnership.

Prior and pending litigation
All D&O policies will exclude existing claims, prior or pending proceedings against the company or its directors and officers. Similarly the policy will exclude any prior existing circumstances which should have been notified or were not disclosed.

Major shareholders/closely held
D&O policies are designed to cover claims made by shareholders. However insurers often endorse the policy to exclude claims made by 'major' shareholders, sometimes referred to as a 'closely held' clause. This is because they may have a controlling influence over the board.

Wrongful profit
This applies where a profit or advantage is gained from a wrongful act.

Other common exclusions
Common exclusions include bodily injury and radioactive contamination; claims made by the company or a current director - unless at 'arms length', i.e. that the claim is brought without any connivance on the part of the directors.

Purchasing cover online

With the introduction of many online quote and buy services it is important that you read policy wordings including particularly the exclusions. Many websites tell you "why you need to buy their D&O cover" and the risks you may be exposed to such as Corporate Manslaughter but the actual wording may not necessarily provide the coverage. 

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Important conditions.

Insurers need to be advised of any mergers, acquisitions, share offers etc, if full cover is to continue. .
Prompt notice of circumstances that might lead to a claim is vital, as in the case of any 'claims made' policy.

Extensions to cover

• Outside directorships. Directors can get extra cover for other directorships held by them. Often referred to as an 'outside board' extension, it is designed for directors that may be appointed to the board of a client company.
• Spouse extension. Cover can be bought which covers a spouse of a director if there is some risk of liability; this is most relevant in family-run companies.
• Environment. Additional cover can be purchased for environmental exposure. Usually the cover extends only to defence costs.
• EPL extension. Cover for EPL (Employment Practice Liability) can be provided either as an extension to a D&O policy or as separate cover. New employment law has enhanced the employment rights of all in the workplace against the company, rather than the individual directors. The company could be exposed to litigation involving sexual and racial discrimination, unfair dismissal and harassment.

Associated links

• Companies House
  Companies House registers and provides company information.

• Institute of Directors (IoD)
  IoD is a world-wide association providing a network that reaches into every corner of the business community. Membership is individual -each member joins the IoD in his or her capacity as a director.

• Department of Trade & Industry
  The DTI works with businesses, employees and consumers to drive up UK productivity and competitiveness to deliver prosperity for all.

• Health & Safety Executive
  Ensure that risks to people's health and safety from work activities are properly controlled.

• The Inland Revenue
  The Inland Revenue provides information on tax and national insurance matters in the United Kingdom.