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What Is Management Liability or Directors and Officers Insurance?
Directors and Officers (D&O) Insurance or Management Liability Insurance is a product designed to cover directors and certain managers in respect of legal expenses, awards, damages, and settlements in the event of prosecution, investigation, particular claims or regulatory action specifically covered by the policy. Many policies will provide similar cover to the corporate entity in addition to the individual directors and officers. Actions and investigations may arise in a variety of circumstances, including:
- Regulatory investigation and/or prosecution
- Shareholder or stakeholder civil actions
- Creditor or employee actions
Policies may also include cover in specific risk areas such as:
- Employment liability
- Internal fraud
- Or specific employee benefits
The insurance policy is designed to help responsible professionals carry out their organisational duties without fear of personal financial loss. It is part of good governance across the organisation and guards the corporate entity in relevant risk scenarios. All types of businesses carry a certain risk and a director or officer cannot always ensure that day-to-day decisions will succeed in advancing the business.
Who Buys Directors and Officers or Management Liability Insurance?
The vast majority of PLCs and larger private companies will take out comprehensive cover. Smaller companies may only require cover in specific areas. Quite apart from giving protection, the existence of appropriate policies is often a term specified in mergers and acquisitions.
A greater number of smaller companies and professional services firms are now purchasing D&O insurance because of the increased risk, relative to their size and level of resources. The number and complexity of regulations increases year on year and smaller organisations also need to know they can explore new lines of business with confidence.
Is It Expensive?
Quotations for cover of £200,000 can cost less than £400. It all depends upon a number of factors, including:
- The age of the company - new start-ups are difficult to cover
- The health of the accounts - a healthy company is more likely to be run by responsible directors and officers
- Where the company operates - doing business in countries where bribery is commonplace produces a higher risk
- The nature of the business - is it a highly regulated environment or does it involve a high number of agents?
- The size of the company - large companies are usually more expensive to cover, although some small companies carry high risk
- Ratio of staff to management - a large number of directors and officers relative to staff numbers can influence the required cover
- The compliance history - it will usually be more expensive to cover a business with a history of investigation and prosecution
- The required policy features - many policies will include extra features for clients with specific requirements
Obtaining a quotation is much simpler than one might imagine, although we do not recommend online quotations because of the bespoke nature of the product. JMW Protect takes the effort out of the process so that you can access the best available advice. You can contact us on 0345 241 3023 for a no obligation discussion.
Features of Insurance Cover
Your insurance provider should respond quickly and effectively to operational difficulties, particularly in the event of an unexpected intervention by a regulatory authority or prosecutor.
Insurance cover is available to any UK registered private limited company, charity, club or association. Cover is normally provided up to the selected limit for any one claim, with no limit on the number of claims in any one period of insurance. Typical cover includes:
- Legal costs, awards and settlements for any claim or regulatory action brought against any past, present or future director/trustee/officer/employee
- Legal costs of representing any director/trustee/officer/employee at an official investigation
- Automatic cover on the same terms for all subsidiary companies including any subsidiaries bought during the period of insurance
- Claims brought in other jurisdictions
- Claims caused by the operation or administration of any pension scheme, employee benefit scheme or trust fund
- Claims against directors/trustees for ten years following retirement during the period of insurance
- Claims caused by a failed public offering
D&O insurance will usually include interim cover on the same terms following a management buyout.
Employment Practices Liability
Many claims in management liability cases involve employment issues, whether they arise as discrete problems or as part of a regulatory intervention. JMW offers HR365 as part of our risk management service, with different levels of service to suit your individual needs. HR365 provides businesses with complete HR management services. Click HERE for more details.
The Hidden Cost of Investigation and Defence
The arrival of Deferred Prosecution Agreements (DPAs) in the UK adds another dimension to the potential costs of regulatory intervention. For example, the Serious Fraud Office may require a business to pay for an investigation into its own affairs and if a DPA is the result, the business will have to meet the costs of monitoring over the deferment period. Other regulatory authorities already charge the costs of their investigation to the company.
If the company is the subject of internal fraud or a cyber-attack, the costs of tracing stolen assets, disaster recovery and data breach can be crippling. Some or all of these costs can be covered by an insurance policy.
Legal Aid Changes - What Do They Mean?
When criminal proceedings are brought against an individual in relation to the business, changes made to the Legal Aid regime in 2014 can mean that Legal Aid is simply not available to directors or officers. Funding a complex defence without insurance cover or Legal Aid can be financially crippling to the individual and even where Legal Aid is available, the reduced hourly rates are such that fewer solicitors and counsel will represent in publicly funded matters.
Those relying on Legal Aid representation will find themselves assigned relatively junior lawyers or senior lawyers who are prepared to offer only a very basic level of representation. An insurance policy can cover those costs and avoid the severe limitations imposed by Legal Aid representation.
The JMW Protect team includes very experienced defence lawyers, each with over 20 years’ experience in cases involving private and public funding.
What Level of Cover is Appropriate?
The last thing a business wants is a redundant insurance policy that is not fit for purpose. Some businesses are prompted into taking out policies without understanding the risk, and many brokers require assistance in understanding the nature of the business. This can lead to situations where certain risks are not covered, or the company pays too much for risk it is unlikely to encounter.
The JMW Protect team will work with the insurance advisor to ensure that your business makes a fully informed decision on the appropriate level of cover.
Typical Risk Scenarios
The central function of a management liability policy is to provide directors and officers with financial protection against the consequences of actual or alleged wrongful acts. Costs arising out of risk scenarios covered by a typical policy include:
- Regulatory investigation or prosecution
- Adverse financial awards in the event of a civil action
- Shareholder actions
- A competitor's antitrust or unfair trade practice allegations
- Employment liability claims
- Decisions exceeding the authority granted to a company officer
- Misrepresentation in a prospectus
- Third-party claims in the event of bankruptcy
Our team will work with you to understand the biggest risks to your business and ensure you have the insurance cover you need.