Who Needs D&O Insurance?
If you are the owner of a corporation or any business with a board of directors, you will need Directors and Officers (DO) insurance cover. According to business insurance experts NimbleFins, DO insurance is needed to protect key members of the organisation and protect them personally from losses associated with financial claims against them in their capacity at work.
Not just any claims.
D&O insurance is acquired for the specific purpose of protecting employees from allegations of wrongdoing or illegal activity. Claims of this type can be brought from suppliers, vendors, employees, and other parties against directors and officers of the company. Having this type of insurance will cover the financial costs associated with claims, including legal fees and settlements.
However, while this type of protection will shield company members from alleged claims of wrongdoing, it will not protect if unlawful behaviour is actually proven. This could include things such as:
- Breach of duty
- Wrongful trading
- Breach of trust
Deliberate acts of dishonesty or fraud will not be covered, nor will fines or penalties that government authorities or regulatory offices impose.
Why is D&O insurance important?
Having D&O insurance in place is important to protect company leaders from claims arising from actions taken or decisions made while performing on behalf of the company. Even if the business is operating within the necessary guidelines, mistakes can still occur, and D&O insurance can help guard members against claims.
As company management takes a higher degree of personal responsibility for issues, some directors will expect that the organisation has D&O insurance to provide them with personal protection. For businesses that are seeking to attract new talent, this can be an important consideration for potential corporate officers.
It can also be beneficial when seeking investment from external sources; raising funds and gaining financial support may be easier with directors and officers insurance in place. This can offer an added layer of security for investors when injecting funds that protect against future losses due to mismanagement.
Without this type of insurance coverage in place, directors and officers could be liable personally for claims. In addition, may not be able to protect from occurrences like wrongful dismissal, civil proceedings, and criminal prosecutions. It can also protect managers and leaders from claims connected with insolvency and legislative breaches.
Do non-profits need D&O insurance?
It can be a common misconception that organisations that are structured as non-profit do not need D&O insurance. However, the reality is that non-profits can benefit from having D&O insurance just as much, if not more, than any other type of corporate entity.
The boards of non-profit companies can frequently be made up of volunteer directors and officers which although they may be well-intentioned, can frequently be inexperienced, leaving a higher risk of errors or incidents occurring that may trigger a claim.
Business decisions may not be made in the same way as for non-profit organisations, and directors may not be as familiar with business processes. With the risk of non-profits not operating as efficiently as for-profit companies, directors and officers insurance can be essential to protect the business leaders.
According to recent research of all D&O claims brought against companies, 58% were against non-profit organisations. As the cost of an average claim can be substantial, insurance will be required to protect non-profit directors and officers adequately.
Why buy D&O insurance?
Protecting the board members of a corporation essentially holds the business harmless from any claims brought against an individual staff member. Thus, D&O insurance covers the current members of the company and protects past and future directors.
Insurance can be purchased for companies of any size. Larger organisations typically understand the protection offered by D&O insurance and have a policy in place as part of risk management. But smaller companies can also benefit from directors and officer insurance and are increasingly opting to buy coverage.
How much is D&O insurance?
A basic D&O insurance policy can be as little as £500 annually, but this number will increase based on a number of different factors. This can be things like:
- Level of risk
- Industry type
- Number of employees
- Coverage limits
- Special considerations
- Experience of directors
- Company structure (for-profit/non-profit)
It is important to ensure that the level of insurance purchased provides adequate levels of coverage for the company directors. Claims can be high when coupled with legal expenses and can soon surpass the net worth of individuals. Therefore, it may be best to seek professional advice when determining coverage limits.
D&O insurance is specifically designed to protect decision-makers; it does not provide protection for other areas of the business, and companies may need to obtain other policies to guard against liability. These can be insurances such as public liability, general liability, and professional indemnity.