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What’s directors’ and officers’ insurance and who needs it?

31/01/2023

Directors' and officers' insurance. Board room meeting.

However big or small your company, whatever work you do, you’re always vulnerable to claims.

We know you’re sick of hearing this cliché. But it’s true. Where there’s blame there’s a claim.

And more often than not, it’s the top dog that ends up taking that blame. Which is where directors’ and officers’ insurance can help.

Maybe you’re your own boss. Maybe you’re one of several directors. Or maybe you’re in a key management role.

Either way. If someone thinks you’ve dropped the ball and not done your job properly, they could sue you as an individual.

That means your own personal finances at stake. Not just the company’s. Yours.

Money won’t be the only thing on your mind either. If you’re found to be in the wrong, you could lose the right to be a company director ever again. Worse still, you could be faced with criminal charges.

Then you’ll be feeling less top dog, more lowly rat.

So, let’s get down to business…

Directors’ and officers’ insurance explained

What exactly is directors’ and officers’ insurance? (D&O for short.)

In a nutshell, D&O insurance is there to protect those in a position of power. If an owner, director or manager is sued as an individual, directors’ and officers’ insurance will cover their legal expenses and fork out any compensation owed.

D&O is pretty unique. Whilst other insurances are there to protect a business and its reputation as a whole, directors’ insurance protects the people behind it. Because being in charge means taking personal responsibility for your actions.

There are literally hundreds of laws and rules you could be accused of breaking as a company owner or director. Health and safety breaches, breach of company law, financial misconduct – these are just a few common themes.

Claims of this nature are usually very complex and involve a lot of investigative work. So, you can probably guess what that means… ££££££. Yes, unfortunately, more work for the solicitors means bigger fees for you. Directors’ insurance will pay for any investigative work to be carried out.

Then there’s employment practices, which are covered by an add-on to D&O called employment practices liability insurance (EPLI). And here’s where you really need to pay attention. Because a sizeable percentage of claims come from disgruntled former or current employees.

We’ll tackle EPLI next.

What’s EPLI and what does it cover?

As well as the Employment Act, there are several other sets of laws designed to protect employees. The scales are definitely tipped in the employees’ favour when it comes to the law, and perhaps rightly so.

But it does mean some extra effort and attention is needed on your part. You need to know what your legal obligations are where your staff is concerned and make sure you meet them. Because not knowing you were doing something wrong is no real defence.

There are all kinds of issues that can arise. Think unfair dismissal, harassment, breach of contract, retaliation, discrimination, failure to promote… The list is endless.

And claims of this type are on the rise. Due to the pandemic, social movements, Brexit and various other external factors, employers are seeing a considerable increase in claims from unhappy employees. That’s why EPLI has become an essential part of any business insurance package.

With EPLI added to your policy, your legal expenses and compensation pay-outs are covered if a claim of this nature is made against you. Helping to keep your bank balance and your reputation intact.

Employment law claims are sometimes unavoidable, but there are plenty of things you can do to prevent them happening unnecessarily. Like regularly checking your company policies and employee handbooks are up to date and relevant. Also ensure they’re fully transparent and that your employees understand them.

If you do run into problems with an employee, make sure you document everything, through all stages of the complaint.

What’s the difference between directors’ and officers’ insurance and professional indemnity insurance?

A sensible question, and one that’s easy enough to answer.

Picture this – one of your employees gives a client questionable advice, which leads to a huge financial loss. This would be covered by professional indemnity insurance.

But the client also decides to sue the company’s board of directors for failing to hire someone with adequate qualifications or provide appropriate training. That’s where D&O comes in.

Do I need directors’ and officers’ insurance?

Er, probably, yes.

If you’re a sole trader or self-employed, you’ll probably find professional indemnity and public liability insurance can adequately cover your needs. But if you’re registered as a limited company, you’ll probably want to consider D&O insurance.

If a client is unsuccessful in claiming against your limited company, they can then claim against you personally, as the director, and go after your personal assets. Best be prepared with D&O then.

You might think that being a small company makes you less of a target. But in reality, it just makes you more vulnerable.

You’re just as likely to be faced with a claim. But being a small business, chances are your funds aren’t limitless.

A claim of financial mismanagement, or worse still – corporate manslaughter, could see defence costs reach a six-figure sum.

Without insurance to back you up, that could be your house, car, or holiday fund all down the swanny. No thank you.

How do I get D&O and EPLI insurance?

That’s another easy one.

Whether you own a small, limited company or sit on various directors’ boards across different companies, directors’ and officers’ insurance with EPLI is definitely worth putting at the top of your insurance wish list.

You can get a quick online quote here. Or if you’d prefer to talk to a real human about it, give us a ring on 0345 222 5391. We do email too: contactus@policybee.co.uk.

Image used under license from Shutterstock.

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