What is directors & officers insurance?

By March 7, 2017 September 10th, 2018 General Business


Running a company is tough and you don’t want to make it any tougher than it needs to be as a result of not being covered when the proverbial hits the fan. One area of cover that should be of interest to you if you’re running a company is directors and officers insurance.

So, what is “directors & officers” insurance? Basically, it is cover against losses resulting from legal action brought against directors and officers of a company whilst acting in their capacity as directors and/or officers of the company. Such a policy can provide some piece of mind for directors and officers and allow them to get on with the running of their business.

Many of you would have some form of directors & officers cover (D&O) , be it through a policy your company shares with directors (such as Management Liability), or via a standalone policy reserved for directors only.  What you may not be aware of is that such policies all contain fine print that require those insured to act in a certain way or to make the insurer aware of changes in their business – before the fact.  We’ll list some of these below to get you thinking.

Did you know that most policies contain a clause that prevents the insured party from disclosing the existence of such a policy, its limit or the premium paid ?  Many of these things commonly appear in the financial accounts issued by accountants on behalf of their clients. There are exceptions to this non-disclosure rule, and that is where the insurer provides written consent or disclosure is required by law. A failure to comply with these conditions does give the insurer an opportunity to deny liability, particularly where the insurer’s position to defend the client/claim has been prejudiced as a result of the information disclosed about the policy. What to look for? “Confidentiality Clauses/Conditions/Exclusions”

Another common issue is that insurers are increasingly worried about claims that arise from capital raising, be it for private or public companies.  Such conditions can reduce, or eliminate cover altogether for claims where a policy holder has failed to inform the insurer prior to the sale, or release of additional securities within the business.  Businesses looking to expand will release new shares to fund new purchases – what can happen is a dilution of the value of the shareholding for existing stakeholders, resulting in costly legal action against the firm or individual company officers. What to look for? “Securities Exclusion”

Disputes between board members are a common occurrence.  However, when it escalates to legal action, what many don’t understand is how their policy will respond.  Whilst this is entirely dependent on the type of cover they have, and a few other factors, many will exclude such claims. What to look for? “Insured vs. Insured Exclusions”

Lastly, most insurers will not cover claims brought by or on behalf of shareholders with 15% or more equity in that business. What to look for? “Major Shareholders Exclusions”

Note from Generate:

Whilst having and understanding relevant insurance cover is your responsibility, a good insurance broker can read the fine print for you and alert you to any shortcomings the policy may have or any corrective action you may need to take to ensure you’re adequately covered. If you’re looking for a good broker, we recommend speaking with James Fletcher of Malton Road Advisory.

The above is general in nature only and does not constitute advice. If you’d like to discuss managing risk, or anything else to do with your business, get in touch today. We’d love to help!