How Does Directors & Officers Insurance Work?
With over half of Australian SMEs currently in their growth stage, with yearly revenue of between 10 and 50 million AUD, it’s not surprising that many business owners are looking to protect their developing companies.
While a business could have appropriate insurance for property damage, public liability and theft, it’s easy to overlook your personal liability as a director or a manager and have the right insurance in place.
Directors and officers insurance (usually referred to as D&O insurance) or Management Liability Insurance, a package policy that includes D&O insurance, will provide similar cover.
What is D&O Insurance, and How Does it Work?
D&O and Management liability pays your personal legal costs and pays for any damages awarded against you personally for either an actual or alleged act concerning the performance of work-related duties and responsibilities.
The policy will also reimburse the company for any legal costs advanced to the director or officer. There are hundreds of laws and regulations in states and territories that directors and officers must comply with, including OH&S, workplace risk, Corporations Laws, ASIC, environmental laws etc., when managing or operating a business.
Generally speaking, D&O insurance provides cover on a claims-made basis. This means that claims are only covered if an event occurs, and a claim is also notified during the policy period.
As a director, you might be held personally responsible, and as such, your liabilities will be unlimited, unlike the liability of any shareholders.
Directors and officers insurance covers your personal liability for actions (or omissions) while undertaking your director or senior manager duties.
It’s also important to know that Professional Indemnity Insurance does not cover the same risks as D&O and Management Liability Insurance. Professional Indemnity covers financial loss, including damages caused to a client, allegedly due to following negligent professional advice.
Insurance advisers will analyse your objectives, needs, financial situation and risk profile to develop appropriate strategies, including recommending insurance solutions. A comprehensive management liability or a D&O insurance policy will provide cover in the event of actual or alleged mismanagement, including from
- Regulatory authorities,
- Competitors, or
Why You Need D&O Insurance
Claims, or legal action can come from employees, partners, financiers, government regulators in your industry or shareholders. Any one of these could easily result in high personal legal costs in defending an action and potentially having to pay any damages awarded, if partly or fully at fault.
Examples of situations where D&O Management Liability Insurance can provide cover include
- Breach of duty,
- Breach of contract,
- Inaccurate reporting,
- Theft by employees or contractors,
- Unfair dismissal and
- Occupational health and safety incidents.
Essentially, this insurance protects you as a director, office or manager, and the business against the costs related to an investigation, legal defence costs, or court awarded damages.
It doesn’t matter whether you’re a small, medium or large business; you have personal financial exposure as a director or officer.
How Long Will D&O Insurance Cover Last?
D&O and Management Liability Insurance cover all past, present and future directors, officers and senior staff (i.e. line managers or supervisors) against claims of actual or alleged wrongful acts, errors or omissions in their work duties.
In most cases, insurance is purchased annually, like other insurance policies.
However, this is a Claims Made Insurance policy, which means that for directors, officers, and managers to be covered before the policy’s renewal date, any claim or circumstance that became known to management during the past 12 months must be notified to the insurer. This includes circumstances relating to a prior officer or director up to seven years after leaving the company.
However, it’s worth noting that insurers will not cover directors or officers for claims from outside companies or known before the current policy if the director or officer knew and did not declare the claim or circumstances.
Different types of D&O insurance
There are two sections to a D&O insurance policy, being:
- Side A Cover is cover for directors where there is no other indemnification, such as under the Deed of Indemnity (between the directors, managers or officers and their company), available. It is the direct cover to directors, managers or officers regarding liabilities and legal costs of defending claims against them made by the company or third parties for wrongful acts committed in their capacity as directors or officers.
- Side B Cover reimburses the company for its legal costs to indemnify the directors, managers or officers, who are covered by a Deed of Indemnity. It covers the company for its liability to indemnify its directors and officers for liabilities and legal costs in claims made by third parties for wrongful acts.
Depending on your business, there may also be extensions to cover, including fines and penalties, environmental impairment, and shareholder actions.
If You Sell Your Company, Do You Still Need D&O Insurance?
If your business is sold to another party, all cover stops on the transaction date. Any claim or circumstance before the transaction date is still covered up to the annual renewal date. Before the renewal date, your insurance adviser will arrange to extend the policy for up to seven years, providing ‘Run Off’ cover.
Any claim or circumstance you become aware of during the Run Off period can be notified under this policy to ensure you are still covered.
Does D&O Insurance Cover Everything?
It’s worth knowing that although D&O insurance covers directors, officers and managers from many types of claims, there are circumstances that won’t be covered, including:
- Fraud by directors and officers,
- Personal injury,
- Property damage,
- Personal profiteering, and
- Intentional or illegal acts.
Do You need D&O Cover if You’re No Longer a Director?
Once a director has resigned or left a company, some D&O cover must be continued to ensure a claim can be notified.
This is because even after leaving a company as a director or officer, they could still be named in legal action.
The best D&O policies will have ‘retiring director and officer cover’, which automatically provides seven years of coverage from the date of resignation of the director or officer.
At Insurance Advisernet, our expert insurance advisers can negotiate a specific insurance program to meet your requirements, including risk mitigation advice and recommendations for the most appropriate sum insured for the D&O insurance coverage.
By identifying your personal and corporate liability, we can work with you to design and implement a tailored insurance policy to protect against high personal legal costs in defending an action and any damages awarded by a court.
If you’re looking at getting directors and officers insurance, contact Lewis Insurance Services on 07 3217 9015 or send us an email by clicking here.
This article was published by our AFSL Licensee, Insurance Advisernet Australia P/L, www.insuranceadviser.net
This information and any accompanying material does not consider your personal circumstances as it is of a general nature only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances and considering the Product Disclosure Statement.