Directors' and Officers Insurance cover

Protect your future with D&O cover

Some businesses might dismiss the need for Directors' and Officers' Liability Insurance because they think they'll never be in a position to rely on it. They do so at their peril.

It's been a tough year, but many people in the early-years sector are beginning the gradual return to whatever it is we might eventually look upon as our new normality. No-one amongst us has been untouched by the impact of the Covid-19 pandemic, but we hope you have been able to maintain a solid relationship with your clients and their children and you are feeling reasonably positive about the future.

We should all take some time to congratulate ourselves and our colleagues, celebrating the positives in these strange times. Many business owners have found themselves navigating new situations; furloughed staff, temporary closures, and government guidelines have presented decisions that would have been entirely unfamiliar to most of us. However, it's worth being mindful, as we get back to normal, of problems that could arise in the future because of decisions taken in good faith now.

You sit down with your morning coffee and open your post. One of those letters tells you that you are being sued. It informs you that your business is being accused of a number of alleged 'wrongful acts', committed when you had to let go of one of your employees last year. Not only that, the amount being claimed adds up to hundreds of thousands of pounds.

Having read the letter a second and third time to fully understand its contents, you reach for your phone to make some calls and spot seven missed incoming calls and numerous texts and WhatsApp messages. It only takes a little digging to establish that, not only is your company being sued, but so are you, individually, as well as one of your fellow directors.

When you always strive to run a morally decent, well-managed business, it will come as a shock to hear that a case like this is being brought against you. There's a preconception that these cases will only be brought against larger companies, sadly this isn't the case. It is increasingly common for businesses to be sued for 'wrongful acts', and individual officers and directors can be held personally liable. As a small business, the individual directors must 'wear numerous hats'; legal, compliance, human resources, financial, etc. And these are in addition to 'the day job', so you may not be aware of the extensive number of rules and regulations and the implications of these – especially in the childcare sector.

With these types of cases, the company may not be able to afford to reimburse the individual director(s), even if they were permitted to do so by law and in their articles of association. Even if you or your business are not proved liable, you may be left with a large legal bill, and the time taken to defend the allegations will have a huge impact on your ability to run or grow the business.

So, now to the important question. What decision will you make?

We appreciate that many of our clients may not be aware of Directors' and Officers' Insurance and its benefits, so we hope this summary will help to make you more informed and empowered to make the most appropriate decisions when considering your insurance programme.

To help you be more informed about the benefits of Directors' and Officers' Liability Insurance, we have explained the cover and your options in more detail below.

What is Directors' and Officers' Liability Insurance?

Directors' and Officers' Liability Insurance (also called D&O Insurance) provides indemnity for the legal and compensation costs incurred as a result of alleged wrongful acts of a business' directors and senior managers (officers). In addition, the insurance can also include indemnity following any civil, criminal, or regulatory proceedings brought against the director or officer if they are found to have acted outside their terms of reference.

Examples of 'wrongful acts' include:

• breach of trust
• breach of duty
• neglect
• error
• misleading statements
• wrongful trading.

Typically, claims are brought against directors by:

• employees
• regulators
• shareholders
• investors
• creditors
• other affected third parties.

It is important to note that D&O insurance does not provide coverage for Physical Injuries and Property Damage, as these are covered under different insurance policies.

What is Entity Insurance?

When D&O Insurance was first created, it sought to insure only the individual Directors and Officers if they were sued personally. As a result, a typical D&O policy only indemnifies the individuals or, if the business had already paid for the individual's costs, the business can be reimbursed under the insurance. Over time, it was not just the D&Os who were being sued, the companies were being sued as well. Since the typical D&O policy does not cover claims made against the company itself, a newer form of insurance cover was developed.

'Entity' insurance can be purchased alongside typical D&O insurance. The policy then provides cover for the individual Directors and Officers and the business. Action is often taken against both the business and the individuals - wherever a claim might 'stick' – so having Entity coverage is well worth considering.

When can you claim on this type of insurance?

D&O and Entity coverage is provided on a 'Claims Made' basis. This means the insurance policy responds when the claim is made as opposed to when a wrongful act occurred. This also means the policy can be tailored to indemnify for (unknown) wrongful acts committed in the past, even if there was no insurance in force at the time the wrongful act was made. However, as the policy is on a 'Claims Made' basis it also means there is a requirement to secure 'run-off cover' in the event of a cessation of Directors' or Officers' activities e.g. retirement or perhaps the company being sold. Coverage is also available for the acts of past D&Os and is even available for D&Os who hold numerous positions across different businesses.

Next steps….

The premium to protect you, your business and your fellow directors - if the courts made a claim on your house and car, for example – can be well worth the money for the peace of mind. The extent of cover afforded is very broad and it can be adjusted to your requirements.

If you would like us to send you a quote, call us on 0330 058 9861or email enquiries@mortonmichel.com