What is directors and officers (D&O) insurance?

As a director of a company, you have the responsibility to manage and build your company towards a successful and profitable future. During this exciting process, it is useful to keep in mind that you can also be held personally liable for legal costs, fines or compensation that may arise through your company’s dealings with employees and shareholders or external parties. For this reason, it is often a good idea to transfer your personal liability risk through obtaining Directors and Officers (D&O) Insurance. Directors and Officers Insurance will help protect your personal assets by providing you with indemnity for the loss arising from a claim alleging a breach of your directorial duties.

What does D&O Insurance cover?

Generally, D&O Insurance will cover a director if a clam is brought forward that he/she has breached his/her duty as a director. However you must always check the terms of your specific insurance policy so that you understand exactly what you are being covered for. As a first step, may be useful to check the definitions of “director”, “loss” and “claim”. This will help you understand who is covered under your policy and in what situations.

Who is covered by D&O Insurance?

Directors are usually defined as natural persons who are duly appointed into the position of director, shadow director, secretary or executive officer. However, your policy may extend this definition to include persons who often engages in the decision making process of a company and also has the capacity to affect the company’s financial standing.

What constitutes a loss?

D&O Insurance policies often specifically define what constitutes a “loss” in order to limit the scope of coverage available to a director. While the policy will provide terms governing how losses are dealt with, general areas of loss that are covered include:

• Civil penalties and punitive damages
• Settlement and defence costs

These losses will be covered if they have come about as a result of the successful defence of a Director against allegations of a ‘wrongful act’ being committed. A “wrongful act” includes errors, misstatements, misleading statements, neglect or breach of duty and wrongful conduct or omissions.  Situations where such wrongful acts may be covered include claims of alleged:

• misleading or deceptive conduct under the Trade Practices Act
• insolvent trading
• breaches of Director’s or Officer’s duties
• breaches of a fiduciary duty
• breaches of OH&S procedures
• claims alleged through official investigations launched by government bodies
• defamation
• illegal or improper conduct

What claims are covered?

D&O Insurance policies will also limit the scope of claims that can be made by a director. Claims generally require that a wrongful act be committed by a director in their professional capacity in order to claim coverage under the policy. As such, you cannot make claims for insurance if you a claim has been made against you breaching your professional duties in a personal capacity or when representing an entity that is not covered by this policy. While every Insurance policy is different, there are general areas that a D&O Insurance policy may not cover. When looking through your policy, keep in mind these general areas of exclusion to see what your policy says about them:

• Unsuccessful defences in both criminal and civil claims
• Dishonesty
• Claims regarding asbestos
• Contributing to pollution
• Claims for Professional Liability (as this is covered by a separate indemnity insurance)
• Participating in nuclear war and terrorism
• Contractual liability

Conclusion

Directors and officers of a company hold great responsibility in managing their companies and often face increasing regulatory surveillance of their professional conduct. For this reason, it is a good idea to get D&O Insurance and make sure that you understand what you are covered for. While you are reviewing your D&O Insurance you may also want to have look at your Deed of Indemnity to ensure that your personal liability risks are effectively covered. To speak with a commercial solicitor, contact LegalVision on 1300 544 755.