Even if your business is a limited company, you personally can face claims for compensation or even prosecution for your actions. Any director or officer - typically a decision-making manager - is at risk
The company can provide some protection, by agreeing to cover legal costs and potential liabilities. But there are legal restrictions on the extent of these ‘indemnities' and they won't provide protection if the company becomes insolvent.
Directors' and officers' liability insurance, also known as D&O insurance and management liability insurance, provides cover for claims made personally against company directors and officers.
As well as protecting you, directors' and officers' insurance can be essential for other key individuals who might be unwilling to join the company without it. Furthermore, if you’re a venture capital backed business, you may find that investors insist that you have directors’ and officers’ insurance in place.
Typical risks for directors and officers
Directors and officers are at risk from a range of potential claims. For example:
- Regulatory authorities may decide to take action against you personally, as well as the company, if they think you have been negligent. For example, you might face action from the Environment Agency if your business causes pollution, or from the Health and Safety Executive if an employee is injured or killed.
- Shareholders, or the company itself, may take action against one or more directors if you fail in your duties or act outside your powers. Investors might bring a claim against you if they think you misled them about the prospects for the company.
- If the company ends up becoming insolvent, the directors could be accused of wrongful trading or making payments that shouldn't have been made. You could potentially be made personally liable for the company's debts.
- A disgruntled employee may claim that they have been discriminated against or harassed at work.
At best, dealing with actions like these is likely to involve substantial legal costs as you defend yourself. You could also face disqualification as a director, a substantial fine or compensation award, or even imprisonment.
Buying directors' and officers' liability insurance
Insurance can be bought by the company - for example, to cover all the company's directors and officers - or by individuals who want to protect themselves.
The cost depends on the amount of cover and the level of risk. An individual director may be able to get cover of £1 million for as little as a few hundred pounds. Costs can be much higher if your company is involved in activities that carry a high risk of claims, such as financial services, or if you want cover to include claims made overseas (particularly in the US).
Like any insurance, it's vital to check exactly what is and isn't covered, and any conditions you need to comply with. Amongst other things, you should look at:
- Exclusions. For example, policies typically exclude cover for fraud or deliberate decisions to breach regulations. A policy is also likely to exclude cover for any legal action that's already under way when you buy it.
- Indemnities. Many policies require the company to indemnify directors and officers as far as is legally permitted. Check whether the policy includes reimbursing the company for any defence and compensation costs it pays.
- Extra options. For example, cover for employee claims may be an optional extra.
You can get advice and buy insurance through an insurance broker or organisations like the Institute of Directors.