D&O insurance explained - your complete guide

That’s where directors and officers liability insurance (D&O insurance) can prove invaluable, providing help with costs to defend claims and settle successful actions. 

What is Directors and Officers Insurance?

Directors and Officers insurance is designed to cover the personal losses of an individual if they are sued for alleged wrongful acts while serving as a director or officer of a company or other organisation.

Wrongful acts can include:

• breach of duty

• breach of trust

• error or negligence

• misleading statements

• wrongful trading

Cover includes legal costs and expenses involved in investigations and defence, as well as costs awarded to successful claimants. 

Why do I need D&O insurance?

All decisions, actions and comments made by company directors and officers (or key managers) are under constant scrutiny as they carry out their daily duties.

Shareholders, for example, want to ensure their investments are protected and lucrative, so they need reassurance that those tasked with running the business are making the right choices.

If they suddenly suffer a loss, they are well within their rights to make a claim against an individual director or officer if they consider him or her to be personally liable for that loss.

Legal action could also be taken by investors, creditors, employees, third parties or regulators if a director or officer is alleged to have committed any wrongful act while carrying out his or her duties.

All allegations of wrongdoing need to be investigated and defended, and legal costs can soon pile up even if the case does not reach court. Without D&O insurance coverage, directors and officers may not be in a position to defend themselves against disqualification, civil proceedings or prosecution, or to cover the cost of any compensation owed. It’s important to remember that, even if you work for a limited company, your own personal liability is unlimited, and courts can seize your personal assets to pay for claims. 

What is covered under D&O insurance?

D&O insurance provides financial protection for directors, officers and managers against actual or alleged wrongful acts when carrying out their duties.

The policy covers:

• Legal costs and expenses involved in investigations and defence, whether or not the case goes to court

• Costs awarded to successful claimants

A number of additional options are available, including:

• Public relations crisis management costs

• Employment law protection

• Entity defence, providing cover for the organisation as well as the individual

Claims are settled up to the D&O insurance limit of indemnity set out in the policy, which varies depending on the cover required and the type of risks you may be exposed to.

Who is covered under D&O insurance?

The policy covers all current, future and past directors and officers of a company and its subsidiaries. The definition of a “director and officer” is very broad, and applies to anyone in a management position or anyone who has authority over another employee or employees. For example, a branch manager, supervisor or team leader would be classified as an officer.

Cover can also be included for non-executive directors.

How does D&O insurance work in practice?

In this section, we’ll look at D&O insurance in action, following a claim from start to finish and looking at some common risk examples.

Remember, in the absence of D&O insurance, or if the claim is not covered, the manager is personally liable to cover all defence and compensation costs.

The process of a D&O claim

1. A director or officer (manager) is alleged to have committed a “wrongful act”, or failed to fulfill their duties correctly

2. As a result, people within or outside the organisation decide to sue the manager, who is informed of the claim

3. Manager contacts the company’s HR, legal and risk management departments for advice

4. The company contacts its D&O insurance broker or insurer and provides details of the claim

5. If the claim is covered under the terms of the policy, the insurer pays the manager’s defence costs

6. If the case is lost, and the claim is covered, the insurer pays for compensation costs as well as defence costs

Common D&O risk examples

Claims under D&O insurance can arise for a number of reasons, and from sources both inside and outside the company or organisation.

Those who are most likely to launch an action against a manager include:

• Shareholders, investors, creditors and banks

• Employees

• Regulators

• Customers, suppliers or competitors

The following risk examples give an idea of where D&O insurance provides cover in practice:

• Employment & HR: to defend an unfair dismissal claim where a manager has been named personally in the employee’s claim

• Shareholder actions: a shareholder may be persuaded to increase their stake on the basis of information received from a director, which turns out not to be true

• Corporate manslaughter: a company and its directors can be sued if their negligence leads to the death of an employee or other party

• Inaccurate company accounts: examples include failing to keep accurate accounts or filing accounts late at Companies House

• Misrepresentation: directors may give misleading on a company prospectus or in information provided to a third party looking to complete a takeover

• Exceeding authority: this could happen where, for example, an HR director exceeds their given authority by agreeing to enter into a contract with a marketing agency

• Breaching regulations: managers can be sued by a range of bodies for breaching regulations, including the Financial Conduct Authority, Information Commissioner's Office, Environment Agency, Food Standards Agency etc.

• Competitor claims: examples of where rival companies can sue include potential trademark infringements or theft of trade secrets, where a manager moves from one company to another

• Creditor claims: creditors can make claims against directors if, for example, a company continues to trade while insolvent, increasing the company’s liabilities in the process

• Claims made by the company: companies can sometimes take action against their own managers if they have committed a wrongful act that causes a loss

Common D&O insurance exclusions

Not all D&O policies are identical, and you should always speak to a broker or insurer to make sure you have the cover you need.

But there are a number of things that most D&O insurance does not cover, including:

• Fraudulent or criminal conduct: this could include embezzlement or insider trading. Usually, insurers will pay for defence costs on the presumption of innocence, but will decline all cover if found guilty by formal ruling or by admission.

• Pre-known claims and circumstances: a new D&O policy will not cover claims that were either known about or ongoing when the insurance was taken out.

• Property damage or bodily harm: other than for corporate manslaughter or following a breach of the Health & Safety at Work Act 1974.

• Claims covered by other insurance

• Illegal remuneration or personal profit

• Pollution

 D&O insurance structure

Although each D&O insurance policy will be slightly different, most follow a common structure.

A standard D&O insurance policy generally has two primary insuring clauses, Side-A and Side-B, normally used for private companies, with an option for a third, Side-C, usually used for publicly listed companies. 

Side-A: cover for the individual - providing protection for the personal liability of director, officers and managers.

Side-B: company reimbursement - reimburses an organisation for expenses incurred in indemnifying its directors, officers and managers from made personally against them.

Side-C: entity securities coverage - protects the organisation when a claim is made directly against the entity as a result of the offer, sale or purchase of its securities. 

How is D&O insurance rated?

Insurers use a number of criteria to assess the risk and decide on a premium for each company’s D&O insurance.

Factors that are considered when arriving at a premium include:

• Financial health: insurers will need a copy of a company's audited accounts to assess its financial health. They will then benchmark this against industry standards, and also assess the outlook for the industry

• Management quality: Insurers may analyse the formal qualifications and professional experience of a company’s board of directors

• Nature of business: companies in higher risk sectors may attract higher premiums. Risk bands go from low (agriculture, manufacturing) to high (pharmaceuticals, bio-technology, oil exploration).

• Time in business: more established companies with a good history may be looked on more favourably

• Business diversity: businesses that specialise in one area may be considered lower risk than those with a large amount of diverse interests

• Mergers and acquisitions: If a company has been involved in any significant takeovers, mergers or acquisitions, insurers will investigate the reasons. A hostile takeover may present a higher risk

• International exposure: companies operating in international markets may be considered more risky, partly because of the variety of compliance requirements in different jurisdictions

• Claims history: as with all insurance, underwriters will carefully review any previous claims, investigating the circumstances and amount paid, including any ongoing claims. Insurers may raise premiums or even decline cover if a company has a poor claims history.

What reassurance does a directors and officers liability policy provide?

A D&O policy removes the personal financial risks faced by a company’s management team, providing protection should an allegation or claim be made against them.

Given that, even if you are a manager in a limited company, your personal liability is unlimited, it provides peace of mind that your personal wealth is protected in the event of an error in your duties.

Why are business individuals so vulnerable?

Those in management positions are increasingly vulnerable to legal action for a number of reasons, including:

• Customers are increasingly aware of their rights and, partly because of the internet, raising complaints is easier than ever. Even if they are unfounded, it takes time and money to investigate

• Similarly, employees know more about their employment rights and are increasingly likely to take legal action

• Because of the Covid-19 pandemic, claims related to redundancies and insolvencies have risen significantly

• With increased personal accountability, changing attitudes and the rise of social media, directors are increasingly exposed to claims related to ethics and culture

• Legal liability is shifting away from companies and towards personal liability

• Regulators have stepped up investigations into breaches of rules

• Cyber incidents have increased significantly in recent years

• There has been an increase in class action claims, where complainants group together to launch a more effective legal action

How much does D&O insurance cost?

As explained above, the cost of D&O insurance depends on a wide range of risk factors, such as the size of a business, its claims record, and the industry sector in which it operates – as well as the level of D&O insurance taken out and any optional extras. As such, it’s difficult to calculate an average cost of D&O insurance, however premiums start from a few hundred pounds but can run into thousands for large companies in more high risk industry sectors.

How much D&O insurance do you need?

The indemnity limit is the maximum your insurer will pay out for a claim, and the level of cover you require will depend on your perception of the risks involved. Your level of risk will depend on the type of business your company undertakes, and the type of situations your management team is exposed to. A D&O insurance broker will be able to help you identify your level of risk, using their experience of previous claims typical in your industry. Smaller companies often have limits of £1million, but companies with a turnover in excess of £50m or involved in higher risk industries may need much higher limits. 

What is D&O insurance for non-profits?

D&O insurance is not only applicable to directors and officers of businesses that are run with the aim of making a profit – it’s just as relevant to those working in managerial roles at non-profit organisations such as charities, churches, social enterprises and professional associations. After all, non-profit directors and officers are essentially carrying out the same duties as their for-profit counterparts. They will be making financial and operational decisions; building future strategies; engaging with third parties; and managing staff members, etc. They are also just as liable to make mistakes or to be accused of having made them. In fact, some may find themselves at even greater risk. Quite often, for example, directors and officers at non-profit organisations will have had no prior experience of these roles at all, and may not fully understand the legal responsibilities they’ve signed up to. Meanwhile, it’s not unknown for experienced for-profit directors and officers to inadvertently relax their approach to leadership and decision-making if they move into a very different non-profit environment – especially if their new role is part-time. D&O insurance mitigates these risks by offering financial protection to the directors and officers of non-profit organisations, should a claim be brought against them as individuals for an alleged or actual wrongful act. 

Director’s and officer’s insurance FAQs

What is a director or officer?

A director or officer includes managers and team leaders, and is defined as anyone in a managerial, decision-making position in an organisation, usually with responsibility for staff.

What is a wrongful act?

A wrongful act is any actual or alleged breach of duty, neglect, error or omission, misstatement, or misleading statement. If the wrongful act causes a third party to suffer financial loss, they can sue the manager, which is where D&O insurance comes in. It should be noted that the wrongful act must be relation to the operation or running of the company, rather than the customer relationship or paid services provided by the company. If a complaint of this kind came in, it would be covered under Professional Indemnity insurance. 

Why are financials needed for D&O insurance?

Underwriters require financial information about a company, including the latest set of audited accounts, to gauge: the financial health of the company; how effective its management team is; the structure of any mergers and acquisitions; and what past financial events may affect future risks. Up-to-date management accounts, budgets and a business plan can also be useful. 

Does D&O insurance cover employees?

D&O insurance typically covers claims made by employees against managers, for example unfair dismissal or harassment allegations. However, employees are covered by a D&O policy where they are named in action alongside a Director or Officer. 

Does D&O insurance cover former directors?

Yes, cover is usually provided for all former, current and future directors of a company and its subsidiaries, assuming the claim is made while there is a current policy. 

Does D&O insurance cover negligence?

D&O insurance provides cover for wrongful acts. This can include situations where a manager is negligent in carrying out their duties. 

Does D&O insurance cover breach of fiduciary duty?

Yes, because a fiduciary duty covers several key areas, all covered under D&O insurance. They include duties to:

• Act within your powers specified in the company’s Articles of Association

• Promote the success of the company

• Exercise independent judgement

• Act with reasonable care, skill and diligence

• Avoid conflicts of interest and to not accept benefits from third parties

• Declare an interest in proposed transactions

Who pays for D&O insurance?

D&O insurance is paid for by the company or organisation, not individual directors, officers or managers. 

Can an individual buy D&O insurance?

Yes, individual D&O insurance does exist and may be considered by those who, for example, hold multiple directorships, or where their company does not take out D&O insurance. Where company D&O insurance does exist individual cover will sit above this, paying out when the company insurance liability limits have been exhausted. 

Can I get D&O insurance after quitting as a director?

If you leave a board of directors you are still covered by your former employer’s D&O insurance policy while it remains in force. It’s not unusual to see continuation of D&O cover being a requirement in a settlement agreement when a director leaves the company. 

Is there anything Directors and Officers Insurance doesn’t cover?

Yes, typically D&O insurance does not cover fraud or criminal conduct; pre-known claims; third party property damage; mental anguish, distress or bodily harm (other than corporate manslaughter); illegal remuneration; claims covered by other insurance; pollution.

Each policy is different, however, and you should speak to a broker about your specific policy wording. 

Who can claim against directors and officers?

Claims and allegations can be made by anyone who believes they have suffered a loss because of a “wrongful act” by a director, officer or manager. This will often be shareholders, investors, creditors and banks; employees; regulators: customers, suppliers or competitors. 

Is there a limit to the cover I can purchase?

A limit of liability is the maximum an insurer will pay for claims made against a policyholder. In theory there is no limit to the cover you can purchase, though very high limits will usually require reinsurance (where more than one insurer provides different layers of cover). Private limited companies will usually pay for limits of between £1million and £10million. 

Does D&O insurance coverage previous acts?

Claims arising from wrongful acts that occurred prior to the inception of the policy are excluded, unless coverage is included for “full prior acts”.