What is Directors’ & Officers’ (Management Liability) insurance?

All directors, officers & managers in a company are in a position of responsibility. Managers, directors and supervisors can face civil claims and criminal prosecutions personally. Following recent changes in company law in the UK, even in a company with limited liability status, personal liability is unlimited. Directors, managers & officers are under increasing scrutiny, and allegations of wrongful acts are becoming commonplace. 

Directors & Officers insurance (D&O), which is also known as Management Liability, offers protection for company directors & managers to protect them personally from claims which may arise from the decisions and actions taken within the scope of their regular duties.

Key members of staff are likely to have greater responsibilities and civil claims could be made against them personally by staff, customers, investors, or criminal prosecutions made by the authorities. Under UK law, in most instances the company cannot pay the costs of defending prosecutions or settling compensation claims.

Any allegations of wrongdoing need to be investigated and defended, the costs of which can be substantial even if the allegations prove groundless. This means directors’ and officers’ personal assets/finances are at risk. It is therefore essential that companies provide protection through directors and officers (D&O) liability insurance.

There are different risks in different markets. The USA is the world’s largest D&O market with a premium volume exceeding $7 billion; the most frequent type of claim is employment related, e.g., discrimination, sexual harassment or wrongful termination. The costliest are often securities type claims involving shareholder rights &/or class-action lawsuits. Whilst in the UK these types of claims are rare, UK businesses with US subsidiaries require careful consideration to ensure cover is as wide as possible with appropriate policy limits to provide cover for the often-substantial costs of litigation in the US courts.

Takeovers, Mergers & Acquisitions usually dramatically increase the potential for civil claims by stakeholders and criminal prosecutions by regulators. Cover for such activities is often restricted/excluded as standard from a D&O policy and needs to be negotiated separately. 

Run-Off cover should be considered for all directors when selling a business, as personal liability for wrongful acts committed before the date of sale can still attach and it is highly unlikely that the new owner(s) will pick up these liabilities.

What is a wrongful act? 
This could be a breach of trust, breach of duty, neglect, error, misleading statement or wrongful trading, which is attempted or committed by a director, manager or officer whilst acting on behalf of the company. A wrongful act can result in civil claims, criminal prosecutions or sometimes both.

Why are individual directors, managers & officers so vulnerable? 
• People are more aware than ever of their employment rights 
• Litigation is increasingly risk free – “no win no fee” 
• The emphasis of UK law is shifting away from companies towards personal liability
• Regulator investigations are far more proactive (to act as a deterrent to others)

What is covered under D&O (Management Liability) insurance? 
The main purpose of a D&O policy is to provide financial protection for individual directors, managers and the like personally against the consequences of actual or alleged “wrongful acts” when acting in the scope of their managerial duties. This includes the costs in investigating and defending as well as financial losses (excluding fines). 

Who is covered under D&O (Management Liability) insurance? 
All current, future and past directors, managers & officers of a company and all declared subsidiaries are covered on an unspecified basis. This usually extends also to cover, spouses, heirs & non-executive directors. 

If you would like to talk to us about D&O (Management Liability) insurance, please get in touch on 01823 442214. We would love to talk to you about how we can help protect your business.

Atom Insurance Brokers,
Blackdown House,
Blackbrook Park Avenue

Registered in England No. 4499126 | Atom Insurance Brokers Ltd is authorised and regulated by the Financial Conduct Authority.

The Financial Ombudsman Service (FOC) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details of the FOS can be found on its website at www.financial-ombudsman.org.uk.