What is directors and officers liability insurance and why do SME businesses need it?
As the owner of a SME business, it is important to have the protection you need to for yourself and your business. While the purchase of directors and officers (D&O) liability insurance is increasing with SME’s, it still remains a key form of protection that isn’t as common as it should be.
D&O insurance policies protect company leaders from litigious employees, competitors, investors, vendors, and even customers. Some SME executives believe that their general liability or umbrella business insurance policies will cover claims involving directors and officers, which is not the case.
A business of any size will usually have officers and possibly directors who can be targeted by litigants over their management of company affairs. Plaintiffs in these cases sue on the grounds of alleged “wrongful acts” carried out by managers, like allowing misleading information in a company prospectus or not complying with regulations. In Ireland, many D&O claims concern employees who allege that managers allowed harassment or discrimination. That means any company, no matter the size, is vulnerable to the most common type of D&O claim if it has employees. Other common types of claims involve actions by creditors, by business competitors and customers, and actions brought by regulatory agencies (HSA, EPA, Revenue, etc.).
D&O insurance protects the personal assets of directors and officials from exposures not covered by general liability insurance. For private company officials skeptical of their company’s need for D&O insurance should appreciate that in addition to their company’s exposure, the officials themselves are vulnerable to claims as well. Directors and officers of privately held companies are more likely to be closely involved with all aspects of the company’s business and therefore more likely to be named individually in any kind of litigation. This concern could be particularly apparent in the bankruptcy context, where creditors and others may seek to impose liability on the company’s executives, at the very time when the company itself is unable to indemnify them and to help with their legal expenses. In these circumstances, D&O insurance can represent the individuals’ last line of defence. It is important to note that D&O does not shield managers when they commit fraud or participate in crime, however in which one board member is found guilty of fraud while other members of the leadership team are innocent. D&O insurance could still pay the legal costs of those who did no wrong.
The types of D&O
Directors & Officers (D&O) policies protect corporations and not-for-profit agencies against lawsuits that expose the financial assets of their Board of Directors and Officers and the entity itself. Because D&O claims are usually complicated and expensive, it is extremely important to have an experienced insurance broker handle your D&O policies.
- D&O – Coverage for the individual director or officer
- Entity – Coverage for defence costs and legal liability for claims & prosecutions made against the company. It also covers costs incurred during investigations by the regulators or authorities
- EPL – Coverage for Directors, Officers & Employees for defence costs and legal liability for claims & prosecutions made against them for wrongful employment practices
- PLT – Coverage for the wrongful acts, errors or omissions of trustees, companies, directors, officers & employees in respect of pension schemes or other benefit plans
Different policy excesses usually apply to the various coverages. Experiences brokers will mix and match these forms of coverage according to your business’s specific risks.
Small-business owners might not have a true choice about D&O. Many businesspeople refuse to take leadership roles without it. And if your business wants to raise money in the venture capital market, most institutional investors require the protection. If your organisation is a non-profit aiming to attract quality board leadership, D&O coverage may be a must-have to inspire confidence among would-be board members that their good turn won’t lead to personal financial disaster.
With increasing levels of D&O purchase for SME’s, this has resulted in a competition between insurers with limits of €500,000 cover available for less than €500, subject to underwriters acceptance criteria.
Call our Commercial Team on 1890 300 301 or visit our business page for further information.