By design, directors insurance policies are there to help cover for expenses that will arise from litigation born of whatever adverse managerial decision the company makes. As such, it tends to be a rather comprehensive insurance policy to ensure that directors get the help they need from controversies coming from any angle.
However, that does beg the question: how much should you pay for this type of insurance? Needless to say, it’s going to cost you and your company a certain amount of money to be covered. As to the exact amount, however, that will depend on a number of circumstances.
Why is Director’s Insurance Expensive?
Let’s get this out of the way: a director’s insurance is going to be an added cost that probably wasn’t thought about when going into business or taking on that Director or Officer role. In fact, it could be one of the pricier insurance policies out there depending basically on how much risk you are exposed to.
You might be thinking that the reason for the price is because the people it aims to assist belong to the upper echelons of a corporate structure. Since it assists people with expensive positions, therefore the policy is expensive itself.
Technically, that would be correct. Lawsuits targeting directors tend to be pricier since it covers damages that go from a few thousand pounds to millions, depending on the allegations of the case.
Some of the lawsuits commonly thrown at directors and covered by the policy include:
- Breaches in Fiduciary Duties that resulted in Losses and Insolvency in the Company.
- Misrepresentation of Assets in the Company.
- Actions that Constitute Fraud
- Inability to Comply with Workplace Safety Laws and even Agreements made with Labour Unions.
- Intellectual Property Theft
- Lack of Corporate Governance
Also, a director can be charged for actions that do not specifically revolve around their work but are made existent due to their position. One of these for example happens to be sexual harassment wherein management personnel are accused of doing something inappropriate in front of or directed towards their employees. There are insurance policies that cover such cases but that depends from one policy provider to another.
Why Do Executives Need it, Then?
You might be surprised but many executives are not covered for legal expenses arising from any of the aforementioned cases. The reason for this is quite interesting: it all boils down to who was made the defendant/respondent in the complaint.
For instance, if the name included in the complaint is the company itself, then it’s the people who form part of the company’s legal entity will be held liable for that. In short, it’s the company as a whole who gets sued therefore everyone else in the upper management is liable to answer that complaint.
However, if the complaint is directed to one specific person within management like the director then the concept of personal liability comes into play. Simply put, the director will be made personally liable to answer those charges even if the decision that made that complaint possible in the first place was made with the consensus of everybody else.
Personal liabilities are often not covered by your typical liability insurance policy. This means that a lot of directors often have to spend from their own pockets answering those charges. In worst cases, they could even lose their position in the company if they fail to properly defend themselves in court.
What Determines Cost?
A director’s insurance policy typically ranges from as low as £130 to thousands in premiums per year depending just how big a liability the director is exposed to. As for coverage, your company is given the assurance that usually as much as £1,000,000 plus in legal fees, litigation costs, and damages will be provided for by the company.
To determine how much you are going to pay for a director’s insurance policy, there are a few factors to consider.
- Age – This is simply the time your business has been active in the market. Naturally, businesses with longer operational histories and an experience board of directors tend to have fewer risks in litigation costs. A less mature business, owing to their inexperience, might be prone to making managerial mistakes leading to complaints.
- Type of Industry – Not all industries share the same level of risk when it comes to litigation. The size and scope of the operations will also determine risk factor. For instance, a large financial firm tends to get their directors exposed to a lot of risks coming from complaints and court hearings. Thus, they will pay for higher premiums.
A small non-profit organisation, on the other hand, has fewer risks. Depending on their organisational structure, they might only require a cheaper insurance policy and pay for less in premiums every year.
- Financial Stability or Performance – The amount of capital you have as well as the trend that your business takes as far as finances are concerned will also determine the type of insurance your directors have to avail of. Businesses with higher risk of bankruptcy or, worse, are facing one tend to need more expensive liability insurance policies and pay for higher premiums. A well-capitalised business on the other hand will pay far less as its risk of going bankrupt within the next few years is quite low.
- Workforce Size – More often than not, many liability claims directed towards upper management come from employees themselves. A company with employees by the tens or hundreds might require a cheaper insurance policy. A company that employs thousands operating in different branches, on the other hand, will require a more expensive policy.
The nature of the work of the employees will also determine which policy you must avail. For instance, companies with workers that operate in high-risk work areas such as production facilities tend to require expensive insurance policies than companies whose employees are employed in desk jobs. In short, the likelier workplace accidents are to occur, the more expensive your liability insurance for directors will be.
- Coverage Amount – Every director’s liability insurance policy out there has their own coverage amount which also determines how much you are going to pay for premiums every year. For instance, a policy that assures as much as £500,000 in legal fees might require you to pay some £5,000 per year.
If that amount to be covered can go as much as £1,000,000 however, the premiums you will typically have to be pay may range from £7,500 to £15,000. The point is that a higher coverage will require higher yearly premiums.
Is there Just One Type of Director’s Insurance?
Depending on the factors, you can actually avail of more than one type of directors liability insurance. Regardless of the policy provider, directors liability insurances are always divided into three sub-types known as “Sides”.
- Side A – This is the typical insurance policy and covers directors and officers individually for events that the business can’t indemnify for them. This includes bankruptcy cases.
- Side B – This type of policy can be availed of by the company in the event that they want to support their directors in case a charge is raised up against upper management. This will also cover almost all types of civil and criminal complaints that could be possibly raised against directors and officer.
- Side C – This coverage is ideal for companies who want to be protected as a whole from charges as listed above and for ones that are not covered by the typical commercial liability insurance.
So, given the three sub-types of policies, does this mean that you can only get one type of policy to the exclusion of the others. The answer is no.
Most businesses, regardless of their size, can choose to avail all three types of policies in different combinations. This is where variations in the premiums you will have to pay will come into play. For instance, your company might choose Sides A and B while another while choose sides C and A.
It will all boil down to the type of protection you want to afford for your directors as well as your means to pay for the premiums every year.
In regards to the issue as to the time frame of claims, most director’s insurance policies will cover only claims that were filed during the start of the coverage period. It doesn’t matter when the act occurred so as long as the filing of the complaint falls within the period when the company started paying for the policy.
For instance, your director might have committed fraud in 2016 but the case was only filed in 2017. If you purchased the policy in 2017, the fact that the act or negligence occurred a year before would be irrelevant. So as long as the case was raised during the coverage period, the policy provider will be obligated to financially assist the company throughout the pendency of the case.
The Bottom Line
As of now, it should be apparent that a director’s liability insurance policy is quite a hefty investment. However, if companies are quite serious in protecting their leaders from facing civil and criminal litigation on their own, then these policies are more than vital. The less a director has to worry about defending their case using their own money, the more effective they might be in running the company with you.
What other purposes do you think directors liability insurance should have? Do you think that directors really need this insurance to cover for their legal fees? Let us know in the comments below.
