D&O 101
Directors and Officers Insurance, commonly referred to as D&O Insurance, is a crucial protection for the decision-makers of a company. In a world where lawsuits are becoming more prevalent, the company’s leaders and board of directors face increasing personal financial risks. D&O Insurance offers personal liability and financial loss protection to corporate executives for wrongful acts they may have committed — or have been alleged to have committed — in their roles as corporate officers.
According to the APRA 2023 report on claims trends, large claims exceeding $1 million, often linked to class actions, have surged. From 11 class actions annually (2009-2015), they tripled to 31 annually (2019-2021), resulting in a 53% increase in D&O costs in 2016 (averaging $110 million to $170 million annually). This trend continued in 2020, with costs surging by 78% to an average of $300 million per year. This data underscores the crucial role of D&O insurance in safeguarding directors’ and officers’ financial interests in today’s litigious climate.
What exactly is D&O insurance?
D&O Insurance provides the directors and executives with personal liability and financial loss protection from the alleged and proven wrongful acts committed in their capacity as corporate officers. It may cover defence costs, monetary damages, settlements, and awards resulting from these claims. If a company cannot indemnify its directors or officers for amounts from these claims, D&O insurance will pay those costs, protecting the individuals’ assets. The insurance will reimburse the company if the company indemnifies the individual for the costs. D&O insurance may also provide some cover for the company itself if it were to get sued.
Who does D&O insurance cover?
Directors and Officers Insurance provides financial protection to directors, officers, and the company from legal action arising from a third party making claims against the company. These third parties can include but are not limited to, shareholders, creditors, liquidators, and regulators.
Insured persons may be listed on the policy specifically by name or more generally, by their role. Roles insured generally include executive directors, non-executive directors, Company Secretaries, Executive Officers and employees involved in the management of a company.
The majority of businesses can secure coverage with indemnity limits that span from $1,000,000 to $10,000,000 annually. However, it is possible to get a higher cover amount depending on your specific needs. It’s a good idea to seek advice regarding your level of risk. The chosen level of protection should align with your organisation’s size, operational scale, employee count, and business type.
D&O Policy Summary
The composition of a D&O insurance policy is determined by the specific insuring agreements selected. Side A, B & C policies are available and are standard for most publicly listed companies. However, in certain regions, private or non-profit organisations might opt for just A & B coverage as a strategy to reduce costs.
Side A cover provides direct protection to directors when no other indemnification, like the Deed of Indemnity, is available. It covers directors’ liabilities and legal defence costs for claims made by the company or third parties due to wrongful acts in their roles as directors or officers.
Side B cover reimburses the company for expenses incurred when indemnifying individuals protected by a Deed of Indemnity. Essentially, it shields the company from its obligation to indemnify its directors and officers for liabilities and legal expenses resulting from claims by third parties due to wrongful acts.
Side C cover provides insurance protection for the organisation’s liability.
Claims Example:
Below is an example of a claim example that highlights the importance of Directors and Officers (D&O) insurance provided by The Azure Group. Eco-friendly Technologies is a privately-held company that specializes in renewable energy solutions, guided by a diverse board of directors that includes key positions such as CEO and CFO, alongside various non-executive members.
A serious allegation was made by a group of shareholders who initiated legal action against the company’s directors. The shareholders assert that the company’s leadership neglected to disclose the environmental risks linked to a new technology, which purportedly resulted in a substantial decline in the company’s market valuation. The gravity of these accusations, if substantiated, could tarnish the company’s public image and lead to a severe financial downturn.
Reacting with due diligence, the directors immediately informed their D&O insurance provider about the emerging lawsuit. The insurer takes the helm, scrutinising the claim for its legitimacy under the terms of the policy. Affirming the validity of the claim, the insurance company then appoints a legal team to mount a defence for the directors, shouldering the financial burden of attorney fees and court expenses through the policy’s coverage.
The lawsuit is discreetly settled outside of court. The D&O insurance policy proves its worth by absorbing the settlement and legal costs, thereby shielding the directors from any personal financial loss. Although the company’s reputation initially suffered, the swift and skilled handling of the lawsuit helped to minimise any lasting damage to its reputation.
This case exemplifies the protective shield that D&O insurance provides, serving as a safeguard for both the personal assets of directors and officers and the financial health of the company they serve.
For those contemplating D&O insurance or if you’re seeking clarity on any related topics, don’t hesitate to reach out. The Barrack team are happy to assist, educate, and ensure you’re comprehensively protected.
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