Directors and Officers (D&Os) of companies are exposed to significant personal liability when they carry out their duties in relation to their company. The exposures facing D&Os are unique and complex. Any action taken by a board member can be legally challenged by a third party. They can be held liable for their own actions as well as the actions of others.

Although a company is operated for the benefit of its shareholders, there are also employees, creditors, customers, regulators, and others who are all potential plaintiffs against D&Os.

In addition, D&Os are facing increasing regulation and scrutiny in the current economic climate, particularly following the collapse of many high profile companies e.g. HIH, One Tel, etc.

It is worth noting that even if the D&Os are innocent, the defence costs of a D&O action can put personal assets at risk.

Therefore, D&O insurance is an important consideration for all D&Os.

What is D&O insurance?

D&O insurance has the effect of protecting the personal assets of directors, officers and other management personnel who owe a fiduciary duty to, or perform management responsibilities for an organisation.

It is also a mechanism for transferring loss for any organisation that indemnifies its D&Os.

The Policy Explained

Traditionally, the D&O insurance policy provides two broad Coverages commonly labeled as (1) directors and officers liability coverage, and (2) corporate reimbursement coverage.

The first coverage is intended to protect the corporate executives against loss for allegedly breaching their corporate duties. This is an important coverage, because officers and directors can be held personally liable for their acts, errors, omissions, or other wrongful conduct.

The second coverage protects the company against loss sustained by it in reimbursing its directors or officers for those claims made against its directors or officers in respect of which the company is legally entitled to, and has indemnified the directors or officers.

Under a traditional D&O policy, there is no coverage for claims made against the corporation itself.