Coverage can make for a rather huge issue in the field of insurance. You’re paying for something that is expensive and not immediately necessary, after all, so it’s best that you make sure that it covers a lot of areas that you’d want to be protected from.
A directors and officers insurance policy is one of the more expensive insurance products out there but it can be comprehensive under the right circumstances. But what does it exactly cover?
Who Can be Covered by the Insurance Policy?
Right from the name you could get the idea as to who this policy is aimed for. It will apply basically to anyone who serves as a director or officer for a for-profit company or a non-profit company.
But what are directors and officers, by the way? Perhaps the company you work in uses different terms for positions in your organisational chart and might fuse two positions together. As such, you might be worried that the “directors and officers” in your company won’t get covered by this policy.
To determine if people in your company are directors, officers, or plain employees, you have to answer three questions.
- Is the Position Created by a Corporate Charter or By-Laws?
The positions of officers and directors owe their existence to the country’s Corporation Code or any internal by-laws made when that company was incorporated.
So here’s how it works: If the scope of work of that person is defined by the company’s own charter and by-laws, they are officers and are covered by the policy. If, however, their position is defined by laws in Labour or even Securities, they are paid workers and, as such, covered by general liability insurances.
- Is the Position Elective?
What is the mode of entry for people into that position? If you have to submit a resume, pass interviews and tests, and even go through a probationary period, you are not a corporate officer. What you are, instead, are an employee of the company and covered by the company’s typical liability insurance policies.
However, if you are appointed or elected to that position, you may be an officer. Mind you, the term appointment is loosely defined in labour laws as a director can technically “appoint” someone to fill in positions that normally require your typical hiring process.
This is where the scope of their work would then come into play. If that appointee’s work revolves around the basic operations of the company, then they are not covered by the policy. If, however, their work involves managing the company or making decisions that would ultimately impact the company, then they are in upper management positions which would include officers and directors.
- Was the Election an Act Done by the Directors and Stockholders?
Aside from the scope of their work, what sets apart directors and stockholders from other appointees is the exclusivity of entry in their position. Basically, you cannot become a director or officer in the company unless you are elected to that position.
Now, election is done once every few years or when necessary. It occurs whenever the directors, stockholders, and major officers of the company convene for an assembly to discuss the future of the company. At that time, an election would be called to appoint and install new officers. Election is more immediate as anyone made director must assume their positions immediately after election. This also means that the tenure of an officer is not as secured in the long-term as one might think.
What Acts Are Covered by The Policy?
A Directors and Officers Liability Insurance can be as comprehensive as you want it to be. However, these policies were designed to provide coverage for your directors and officers in several instances. These include:
Claims for Loss and Damages
It’s eventual that directors and officers would encounter from the actions they take and the decisions they make. Complaints can come into two types which are:
- Complaints Arising From Actions carried out in an Individual Capacity
This often happens when a director and officer “go rogue” and make actions on behalf of the company (or for their own) without securing the consent of the others. Naturally, the shareholders and other officers would find such act grossly offensive to the ideals and intentions of the group and would sue the director/officer. This is quite true especially if that decision forced the company into a financially precarious position.
- Complaints Arising From Actions Carried Out In Their Official Capacity
These actions are basically done by the person as part of their official duties that inadvertently offends another party. This includes misrepresenting the company in trade, fraud, misuse of company funds, and even theft of intellectual property. Aside from actions, this also includes omissions such as breaks of fiduciary duties, failure to comply with workplace safety laws and collective bargaining agreements, and even general incompetence.
However, what is important in either of these complaints is that they should have a direct correlation to the office or, at least, made existent only through that position. So, criminal charges like assault, grave threat, libel, and some types of sexual misconduct are not going to be covered by these policies.
- Legal Fees Arising from Prosecution
A lawsuit can be a rather expensive affair. As many officers and directors as well as their actions do not fall under many general liability insurance policies, the lack of a D&O policy would force them to pay for clearing their names from their own pockets.
Typically, D&O insurance policies cover as much as £1,000,000 depending on the premiums you have to pay every year. Such an amount should be enough to cover solicitor’s fees as well as the payment of civil and criminal liabilities.
Conversely, it should cover the expenses of shareholders and executives who charge an erring director/officer for actions they took on an individual capacity. Depending on the court’s order, the insurance company may be legally obligated to pay for such expenses.
D. Indemnity
A sad reality with lawsuits is that most directors and officers who were personally held liable may no longer be able to work even if their names are cleared. Worse, some boards and shareholders may pre-empt the court and fire the director/officer anyway even if they are yet to be pronounced guilty or innocent.
A D&O insurance policy should also cover for indemnification for the terminated officer after the lawsuit so they have the means to support themselves while looking for another company to work in. If the person died or was incapacitated while the case was still pending, the indemnification should also be extended to their heirs and succeeding legal representatives.
How Far Does the Coverage Go?
Aside from the things that will be covered in a D&O insurance policy, you should also make sure that the policy has a rather long lifespan. D&O insurance policies should cover all directors and officers from the past, the ones currently serving their terms, and the ones that have yet to be appointed.
This is made possible through a Prior Acts clause which assures that the insurance company will cover for the legal expenses of a suit arising from acts made before the purchase of the policy. This could be vital for former directors and officers as lawsuits could even pursue them well into their private, post-corporate lives.
When looking at a policy, you should check the extent of coverage on that Prior Acts clause. For the best coverage, look for one that could go as far as the earliest days of the company. This way, every decision that the company has made from its inception would be covered by the policy.
Can Small Businesses Require D&O Policies?
From reading this article, you might be under the impression that directors and officers liability insurance policies are only for big-time corporate businesses I.e. the ones in those high-rise buildings that employ thousands of companies. The truth, however, is that even smaller companies and even non-profit organisations can benefit from having a D&O policy.
The reason is simple: personal liability does not care much about your size and, therefore, your ability to defend yourself properly in court. So as long as a decision or action made by your company infringes on the rights of another party, lawsuits will always be inevitable.
This is why you’d rather protect yourself as well as your directors with a policy that can cover for every legal expense arising from such incidents. If you are worried about the price, don’t. The underwriter will always take the size of your business as well as the industry you are part of and even your financial performance/stability into consideration when offering D&O policies to your business. This way, you can still get the legal assistance and protection you need in the event of a worst case scenario.
What concerns do you have against purchasing a D&O policy? Do you consider your typical liability insurance sufficient enough to answer for all legal complaints? Let us know your thoughts down below.
