D&O Insurance Explained - How To Manage Directors & Officers Risks

D&O Insurance Explained - How To Manage Directors & Officers Risks

Online and social media has heightened the visibility and scrutinisation of every single decision that company directors and officers (D&O) make. Clients, employees, shareholders and peers will all have a view and opinion on the running of the business and these stakeholders may pursue legal action if they believe a decision which has been taken has adversely affected their best interests.

To protect the company against these potential incidents, you should look to arrange Management, otherwise known as Directors and Officers (D&O) cover.

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Personal Assets Could Be At Risk

And the potential stakes are high — directors and officers risk losing their personal assets if they are ever involved in legal action for a decision made in the course of performing their regular duties.  As such, it is becoming more common for individuals to insist upon insurance protection before they accept a Directorship position.

As a business owner, it is vital to have the proper risk management in place so you can attract talented directors and officers to your company. Consider reviewing these three key aspects of your business to boost your Management Liability risk management strategies.

#1 Corporate Structure

Prior to hiring a new director or officer, review your corporate structure to make sure your practices are sound and secure. Focus your review on the following:

Employee Education, Training and Orientation

Examine the type of training and education you are providing your employees - Is this enough? In what areas is more is needed?

Review any incidents that may have occurred in the past due to lack of training. Talk to employees and get their feedback on the amount or type of training they receive – Is this working for them? Where are the knowledge gaps?

In addition, make sure that all managers are completely aware of any compulsory legislation and regulations your company must follow – failure to follow, or breach of legislation, ultimately sits with the leadership team itself.

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Internal Processes and Policies

Take some time to review all your internal processes and policies.  Do they clearly state your ethical standards and what is expected of employees?

Legal procedures should be outlined within each policy so employees are clearly aware of the guidelines they should follow.

Liability Review

Review your company’s potential liabilities in all areas of the business and the amount of risk each liability poses. This includes reviewing the amount of decision-making power each manager or employee possesses.

In some instances, your business leaders may need to rely on information from managers or employees before making a decision, particularly if they do not have the time to extensively research the details themselves.   With this in mind, employees that are tasked with gathering this important data and information for your managers need to be reliable, as the Director will have the end responsibility for the resulting actions taken.

#2 Indemnification Provisions

While reviewing your business’ corporate structure, it is also a good time to take a look at the indemnification clauses in your by-laws or articles of association.

Offered by many companies, indemnification clauses allow an organisation to compensate a director or officer for losses incurred while defending against a D&O lawsuit. It is important to review your clauses if you have not done for a number of years because the language may no longer be clear and you may need to revise or add to the language.

The expenses your executives may incur in a legal dispute can be compensated on either a discretionary or mandatory basis. With discretionary indemnification, companies have no obligation to reimburse expenses, although they can do so if they wish. Reimbursement is decided on a case-by-case basis.

With mandatory indemnification, businesses are obligated to reimburse all officers and directors for expenses incurred as long as the legal action against them is defended successfully. Determining which is better for your business (mandatory or discretionary) means you must consider your company’s appetite for risk as well as the type of director or officer you want to attract into your firm.

Keep in mind that there are exceptions to the indemnification provisions. If legal action is brought against a director or officer by a shareholder, he or she cannot be reimbursed for any expenses because essentially the company would be paying itself. Also, if the company were to become insolvent, it no longer has an obligation to uphold the indemnification provisions.

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#3 Management Liability Insurance

Public liability and products liability policies do not cover the cost of Director's legal actions. Settling these legal actions can be extremely damaging and even if the director or officer is found innocent, legal costs and expenses could potentially bankrupt a company or individual.

With this in mind, many companies choose to purchase Management Liability or D&O insurance to protect their executives from legal expenses and personal liability exposures not covered by indemnification.

Management Liability Insurance provides a wider suite of protection, often including employment disputes and legal expenses for actions against the company itself in addition to challenges against the Directors.

According to research by our Insurer partners AXA, a company is ten times more likely to suffer a sexual harassment claim than a fire – with this in mind, the inclusion of employment cover is often regarded as a key purchase for many firms.

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Take some time to assess the current D&O policy you have in place,  carefully reviewing the specific policy terms and limits to ensure cover is high enough to cover legal action against your directors and officers.

As well as what is covered, pay particular attention to what is not covered - the exclusions in your policy.  Legal claims emanating from employment practice are usually not covered on a standard policy without addition of wider more specific cover.

Why not take advantage of a free business insurance review from Insync Insurance? One of our expert Gurus can discuss your specific requirements and ensure that we tailor your Management Liability Insurance protection to meet your exacting requirements.

You can request a quotation online, alternatively, why not book a review slot at a time that suits YOUR diary.

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