Directors and officers (D&O) liability insurance protects a company's executives from the financial consequences of claims arising from flawed management decisions, breaches of duty or other actions taken in the exercise of their authority. Depending on the policy, the cover may also extend to the organization itself.
What the solution provides
Payment of the losses covered under the policy and of the legal defence costs of a director or the company.
Individual calculation
The limit and cost depend on the industry, financial position, jurisdictions, transactions and claims history.
Important: the policy does not relieve management of the duty to comply with the law and manage in good faith. The insurer reviews each claim, its circumstances, the period in which the act was committed and the terms of the contract.
Who needs a D&O policy
- members of the board of directors and supervisory bodies;
- the chair and members of the management board;
- the chief executive officer and executive directors;
- the chief financial officer and other key executives;
- officers of subsidiaries;
- project managers, if they are included in the definition of an insured person;
- the company, where it reimburses an executive's expenses in the cases provided for.
The circle of insured persons is defined not by a position in the staffing table but by the wording of the contract. You need to check whether former, current and future executives are included, as well as spouses, heirs and representatives within the scope of derivative claims.
What claims may arise
Claims against an executive may be brought by shareholders, investors, employees, creditors, counterparties, competitors, government authorities and other parties. The basis may be an alleged error, omission, misstatement or breach of duty.
- shareholder losses resulting from a management decision;
- misstatement of disclosed or financial information;
- breach of corporate procedures;
- claims arising from mergers, acquisitions or fundraising;
- employee claims of discrimination or wrongful dismissal, where the risk is included;
- breach of duties to creditors in times of financial difficulty;
- defence costs in an investigation by a regulatory authority;
- claims related to a cyber incident or data breach, where the executive is alleged to have failed to exercise proper oversight.
Structure of cover
| Section | Who is protected | What is usually reimbursed |
|---|---|---|
| Side A | The director and officer | Loss and defence costs where the company is unable or not permitted to reimburse them |
| Side B | The company | Amounts the organization has lawfully reimbursed to an insured executive |
| Side C | The company, for specific claims | Corporate claims within the cover expressly stated |
The terms Side A, B and C are used in international practice, but their exact content is determined by the policy. You need to review who receives the payment, against whom the claim is made and whether the company is entitled to compensate the executive's expenses.
What an insurance payment may include
- legal defence costs and the services of agreed advisers;
- amounts awarded by a court, within the limits of cover;
- an agreed settlement;
- the cost of an official investigation;
- reputation recovery costs, if provided for;
- emergency defence costs within the established sub-limit;
- other amounts included in the definition of insured loss.
Fines, taxes and sanctions are covered only where the law allows it and the contract expressly provides for it. Criminal liability and personal punishment cannot be transferred to the insurer.
Main exclusions
- deliberate breach and unlawful personal gain established by a final judgment;
- claims and circumstances known before the insurance began;
- previously notified losses and related claims;
- bodily injury and property damage, where a separate policy is required for them;
- the company's professional error, which is covered by professional liability insurance;
- internal claims between insured persons, with the exceptions to this restriction that the policy provides for;
- breach of sanctions restrictions;
- risks expressly excluded by a special condition of the contract.
Even if a deliberate act is excluded, the contract may provide for the advancement of defence costs until the facts are finally established. The procedure for repaying such amounts should be checked in advance.
The claims-made principle
Most D&O policies operate on a claims-made basis: what matters is the date on which the claim is first made and notified to the insurer, not only the date of the management action itself. The contract may contain a retroactive date and a notification period after the policy expires.
If the company changes insurer, it must ensure continuity of retroactive cover and disclose known circumstances. A failure to give notice can lead to a dispute over which period the claim belongs to.
How the limit of liability is determined
The limit is set per claim and for the whole insurance period. Defence costs may be included in the overall limit and reduce the amount available to pay the claim. Sub-limits apply to certain risks.
- the scale and turnover of the business;
- the ownership structure and number of investors;
- debt burden and financial condition;
- the industry and regulatory environment;
- international operations and listing of securities;
- upcoming transactions, bond issues or capital raising;
- the history of corporate disputes and investigations;
- the size of potential defence costs.
What determines the cost of the policy
The insurance premium is calculated after underwriting of the company and its management. The insurer examines the financial statements, corporate governance, industry, jurisdictions, claims and development plans.
The price is also affected by the limit, deductible, retroactive date, the make-up of subsidiaries and the extensions chosen. Quotes should be compared on the same definition of claim and loss, not on the rate alone.
Documents required to arrange cover
- a D&O proposal form and the structure of the group of companies;
- financial statements and the auditor's report;
- information about shareholders and governing bodies;
- a list of subsidiaries and jurisdictions;
- information about court cases, claims and investigations;
- a description of planned transactions and capital raising;
- current internal policies and control procedures;
- a copy of the previous policy and the loss history.
Answers in the proposal form must be complete and accurate. Information about a known circumstance is especially important: it may become a future claim and affect the terms of cover.
What to do when a claim is made
- Do not delay notifying the insurer.
- Keep the letter, the lawsuit, the regulator's request and related documents.
- Do not admit liability or enter into an agreement without approval.
- Appoint an internal coordinator and restrict the circulation of confidential information.
- Agree on lawyers, the budget and the defence strategy.
- Inform the insurer of significant stages of the case.
- Record expenses and keep the invoices.
You may give notice not only of a claim that has been made but also of a circumstance that is reasonably likely to lead to one, if the contract permits this procedure.
How to choose a D&O policy
- Identify all the persons and companies that must be protected.
- Check the definitions of claim, loss and wrongful act.
- Agree the retroactive date and the extended notification period.
- Clarify whether defence costs count towards the overall limit.
- Check the cover for investigations and employment disputes.
- Assess the exclusion of claims between insured persons.
- Agree the procedure for selecting lawyers and for settlement.
- Check the territory, jurisdiction and sanctions conditions.
Frequently asked questions
Does D&O protect a company against any loss?
No. The policy is intended for claims connected with the actions of executives, and only within the agreed cover. Property, professional services and general liability are insured separately.
Is an error by the chief financial officer covered?
It may be covered if the person is included in the definition of an insured and the claim relates to their management duties.
Can a claim be notified after the policy has expired?
It depends on the extended notification period and the claims-made terms. An extension or special period should be agreed in advance.
Does a small company need D&O?
The size of the business does not rule out an executive's personal liability. The decision depends on investors, creditors, the industry, staff, contracts and the potential cost of a defence.
Conclusion
Directors' liability insurance protects the personal assets of executives and the financial interests of the company in the face of complex corporate claims. The effectiveness of the policy depends on precise definitions, a continuous period of cover, an adequate limit and timely notification.
This material is for information only. The terms and insurance payments are determined by the contract with a licensed insurance company.