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Wednesday30 July 2014

Should I obtain D&O insurance?

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Insurance allows directors and officers to take strategic decisions without threat of personal liability

Legal

Question: I am a director of my practice, which is a limited company. Should I obtain D&O insurance?

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Patrick PerryPartner with London law firm Clyde&Co

Answer: Companies are legal persons in their own right. They can enter contracts, incur liabilities and employ staff. Many directors, as a result, feel “safe” from claims from third parties, in the belief that it is the company’s assets and not their own personal assets which are at risk. However, this is not always the case. It may be depressing reading but the range of duties that company directors are personally under is vast.

Directors can be exposed to potential civil (or indeed criminal) liabilities under companies, tax and finance legislation. Should an employee be injured at the workplace, the directors could face a liability under health and safety at work statutes. Should the company continue to trade when its directors knew there was no reasonable prospect of avoiding insolvent liquidation, the liquidator can look to the directors for the resulting losses.

Against this background of potential liabilities, it is unsurprising that liability insurance is available to protect directors of companies in the event of a claim. This is called directors and officers (D&O) insurance.

Directors and officers insurance is not compulsory. It is however usually purchased by the company for its directors (as a company expense) and this is permitted under the Companies Act 2006 (s233). The reasons for this are numerous, but include the need for a company to attract and retain directors.

If an employee is injured at the workplace, the directors could face a liability

It is an insurance product that is more complicated than standard professional indemnity insurance, as it often seeks to provide insurance cover both to the directors and to the company through various means.

For directors, cover will typically be obtained to include exposures relating to negligence, default, breach of duty or breach of trust, libel, slander, breach of warranty of authority and wrongful trading. The act complained of must have been attempted or undertaken in the capacity as a director or officer of the company in whose name the policy was purchased. There is no cover for acts attempted by a director or officer in a personal (or other) capacity.

Cover is not, however, all-encompassing. English law has certain wrinkles: one of which is that it is against public policy to obtain insurance against paying fines or penalties. The reason for this is that it removes the deterrent/punishment value of a fine or penalty if someone can turn to their insurance company to pay it.

However, even then, you can obtain D&O insurance against the legal costs of defending such proceedings (unless you are ultimately found guilty). Frequently such costs will vastly exceed the actual penalty that may be levied, and so this is still highly important cover.

The value of D&O Insurance is that it allows directors and officers to take strategic decisions and risks, without the threat of personal liability. Without it, many directors would simply not consider the risks worth taking.

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