Why do you need it?
Company directors and officers are exposed to over 200 areas of statutory liability under the 1985, 1989 and 2006 Companies Acts. This means that they can face unlimited personal liability for their actions and decisions on behalf of the company.
Directors and Officers insurance provides cover for compensation and legal costs, if they are found to have inadvertently acted outside their terms of reference.
What cover does a D&O insurance policy provide?
The company can buy Directors and Officers (D&O) cover to protect the personal assets of directors and executive officers and to meet their legal costs. The policy will reimburse the individual for personal liability arising out of what is known as a “wrongful act”. Alternatively, the policy can compensate the company itself where it has reimbursed a director or officer for a personal liability arising out of a “wrongful act”.
The policy usually does not cover pension trustee liability (which can be insured separately), fraud and dishonest acts (covered by fidelity insurance) and employers’ liability.
Cover can vary between insurers but a typical D&O policy will provide cover for:
- Damages and/or settlements as well as costs, charges and expenses following:
- an actual or alleged act or omission by directors and officers in the discharge of their duties
- an actual or alleged act or omission by a director or officer who has been assisting an outside company at the request of the insured
- Investigation costs which result from any formal, regulatory, administrative, criminal or investigative inquiry
- Pollution defence costs on behalf of directors and officers
- Loss of documents to specific limits
Although the policy is designed to cover personal liability, the D&O insurance premium should not be classified as a taxable benefit when paid by the company
How much D&O cover will I need?
D&O cover does not cost the earth. The cost of premiums depends on many variables, such as business activity, financial strength, number of staff, turnover and so on.
For £1,000, which is a common minimal annual premium for a straightforward policy, a handful of board members will get somewhere between £500,000 and £1m of cover.
Most small companies buy between £1m and £5m of cover, but you should really buy as much cover as you can really afford. One thing of note is that when the premiums are paid for by the company they can be charged as a tax-deductible expense.