I’m a Director, Is Director’s Insurance Mandatory?

Insuring directors with a Directors Liability Insurance is often considered a prudent move for any company. With the proper policy, you as the director and other executives in the business can be sufficiently provided for in instances of you getting charged for any supposedly wrongful act you made.

But, this does beg the question, is a directors insurance policy really that mandatory? Unless there is a law that compels every business to get one, the answer is no. However, that does not mean it’s no less than necessary.

Why Would You’d Rather Get Insured?

Although publicly traded companies are exposed to a large amount of risk of getting sued for any decision they make, that does not mean that smaller businesses entities and even non-profit organizations are immune to liability claims. As a matter of fact, there are a few reasons why you should get a liability insurance for directors ASAP.

1. You and Your Personal Assets are Always at Risk

A director is considered as the key person to any company. As such, their decisions can fundamentally change the way the business operates and how it relates to the rest of the community. Due to this, you as the director will be at the crosshairs of every legal problem aimed at the company for any action it takes.

Also, there is this concept nowadays called “personal responsibility”. as the director, you are often considered as a hugely influential person in the company. No decision will be ever made or any action ever taken without your go signal. As such, if things go badly, there is nobody else to blame but you since you, well, approved of that move. As such, most directors put their personal assets and money at risk just by signing every document they receive or agreeing to any decision that the board makes.

2. Lawsuits are a Costly Experience

By design, the position of a director makes them directly obligated to protect the interest of their shareholders, customers, employees, suppliers, creditors, and other agents. Aside from this, they would have to answer to government officials and even their own competitors.

With a lot of people of varying vested interests looking towards a director, it’s no surprise that directors such as yourself are at constant risk of getting sued. As a matter of fact, there are several common instances when a director can get sued:

1. Investors holding them responsible for the company’s poor financial performance.
2. Employees believed that they were wrongfully terminated and, as such, sue for damages. For instance, female ex-employees are of the belief that they were terminated due to gender discrimination or people of color for racial discrimination.
3. An investigating body might look into the business’s transactions and find grounds to hold you personally responsible for alleged discrepancies.
4. Customers might complain to the courts regarding your supposed misrepresentation of the company as well as unfair business practices.
5. Creditors can opt to sue for damages if you constantly fail to have the company attend to its obligations towards them.

At a glance, you can see that the work of a director involves a lot of balancing interest between multiple conflicting parties. You focus too much on one group and you’re bound to annoy the others. Conversely, any act you take even with the intention of putting the company’s interest first will be misconstrued as unfair and oppressive by others. Simply put, if you are not the person that thinks their decisions through, you as the director will always be served a complaint from court.

Now, all of these complaints are quite complex and intensive to deal with but they will always be expensive on your part. Keep in mind that the claims as listed above will not be covered by your typical liability insurance policy. As such, if you don’t want to spend your personal money on clearing your name of all allegations, you’d better invest in a director’s liability policy.

3. To Secure Your Position in the Company

Legal actions are not only expensive, they can also affect the financial security and reputation for all those involved. It is quite common for directors to lose their jobs when being issued a complaint for a number of reasons. The board might lose faith in the director and pre-empt the case by firing the director. Alternatively, upper management might want to “suspend” the director during the pendency of the case to prevent further potential problems from arising.

Now, it’s important to know that a directors liability insurance policy will not directly secure your position in the company. It will be there to assist you in securing the tools that may clear your name which, in turn, helps you keep your job.

Also, it helps you focus your resources on the job. When faced with a lawsuit , it’s natural to get flustered. However, getting too bothered on how to pay for your solicitor can cause you to lose focus on running the company. The policy is there to ensure that you do get the help you need so you can attend to your duties while the case is still pending in court.

What to Look For?

Now, that we’ve settled that director’s liability insurance is quite necessary for any type of business, it’s time to look for one. There are actually multiple types of policies with each providing a different coverage and amount. Regardless of what you choose, there are several provisions that you must find for each policy you sign up for.

1. Definition of the Insured – Basically, you have to find a policy whose definition of who it can cover is as broad as it can be. Sure, directors liability insurance policies are designed for company directors but you may want other similar positions to be covered as well. This includes senior management personnel, executives, members of the board of trustees, and even the owner. The broader the definition is, the more comprehensive that policy will be.
2. Definition of Claim – Like with the definition of Insured, that policy must also have a broad of definition of what claims it can cover. The first thing you have to make sure is that the policy covers various types of lawsuits which will include ones arising from the course of your work (the examples above) or complaints for alleged actions that could only exist by virtue of your office or position. This includes sexual harassment complaints.

Aside from lawsuits, the claims section should also cover non-litigation proceedings. This will include investigations, arbitration, administrative proceedings, and other alternative dispute resolution procedures.

1. Attorney Selection – At best, look for a policy that allows for a company to have a say in selecting their legal representative. The policy itself may assure complete coverage for legal fees but this should not come at the expense of robbing the company the choice to select which lawyer should represent their case.

An ideal directors liability insurance policy allows for companies to have a say in selecting lawyers. Basically, the insurance company will take into consideration first the company’s lawyer of choice. Only if the company has no proper legal representative would they present an affiliate lawyer.

1. Severability – In legal terms, severability refers to any provision in a document that states that even if certain portions of the entire document are deemed illegal, this would not affect its applicability. A severability clause is quite important in director’s liability insurance policies as this renders the entire policy valid even if there are discrepancies in other elements. Without it, a mistake by one of the people covered by the insurance will be imputed to all and the entire policy will be declared void.
2. Definition of Employee Practices Liability – Aside from wrongful termination, the policy should also cover actions arising from alleged acts of employee discrimination and harassment. You have to keep in mind that some policies have a limited coverage when it comes to this section.

Those that do, however, provide you with a list of actions that are covered in this section. It’s your duty, then, to check if that policy covers any of the potential employee practice liabilities that might arise from the operations in your business.

One thing you have to check in the finer details is the distinction that the policy maker gives in each definition. For instance, if the company defines sexual harassment similarly to sexual abuse (they are different as far as the law is concerned, by the way), then sexual harassment cases may not be covered by that policy especially if it has a sexual abuse exclusion clause.

In a Nutshell?

Is a Directors Liability insurance policy mandatory? No. Unless a law explicitly states that companies should avail of one for their directors, you should not be forced to get one.

However, that does not mean that the policy will come in handy in the instance that somebody complains about something that the company did with your approval, regardless if it was expressed or implied. After all, there is just no telling when you might be slapped with an expensive lawsuit that won’t be covered by your typical liability insurance policy.

Do you think that directors liability policies should be made mandatory? What other complaints and claims do you think that the policy should policies of this type cover for? Let us know your opinions in the comments section down below.