DIRECTORS AND OFFICERS LIABILITY POLICY (D&O): Who Needs this policy, And Why?

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              DIRECTORS AND OFFICERS  LIABILITY POLICY (D&O)

Who Needs this policy, And Why?


Every institution has a manager that could be attributed to the title of director or an officer commonly known as D&O this physical person(s) is in charge of the running of a legal person (the institute). Before coming up with the special insurance cover, D&O actions and omissions were attributed to the institution they represent since they are considered representatives of the institution. This is because in law a representative of an institution’s actions and omissions are the deem to be the actions of the institution itself. In the course of commercial history, D&O committed acts or omissions (liabilities), affecting third parties negatively thereby breaching the ‘Neighbor principle’. D&O usually hit themselves under the armpit of their institution, which in turn causes the institutions huge sums of money through liability claims. In law there is a maxim that states “Justice can not suffer a wrong without a remedy”, this is why there is the need to hold the D&O responsible for their deeds through the establishment of this policy. 


Brief History of Liability Insurance


This insurance policy is a pretty new business in the insurance industry as it was first marketed in the 1930s by Lloyd's. In the 1980s, the United States experienced a "D&O crisis" along with the overall liability crisis, with increased premiums, reduced availability, and numerous additional exclusionary clauses in the insurance policy. Due to changes in securities laws in the 1960s, the insurance was sold primarily based on the concerns of directors & officers of "personal financial protection", (26, October 2020). In Wikipedia. 

Similarly, the Directors and Officers (D&O) Liability is relatively new to the UK market. Directors are PERSONALLY LIABLE and the Companies Act (1985) prohibits companies from indemnifying directors for their liabilities except for costs incurred by him in the defense of a claim. The popularity of D&O cover has increased during the last thirty years due to a dramatic rise in claims by shareholders against directors. Recent examples include Enron and Northern Rock and these highlights the extent of liabilities of directors and the benefits of D&O Insurance, (MITC, 2017)


Who is a Director or Officer in an Institution


"Directors and officers" are generally defined as persons who were, now are, or shall be directors and/or officers of the company including estates, heirs, and legal representatives or assigns of directors and/or officers in the event of their death, incompetency,

insolvency or bankruptcy, (Greenberg & Dean, 1975). 


Types of Directors and Officers 


-A de jure director, that is one who has been validly appointed to the office;

-A de facto director is one who claims to act and purports to act as a director although not validly appointed as such; and

-A shadow director, by contrast, does not claim or purport to act as a director. He lurks in the shadows sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. Usually excludes his/herself as a director but his/her opinion plays a great role in decision making in the institution. 

Question: You as a director or officer where do you belong?


What Does D&O’s Policy Cover and What It Excludes

 

The question that may pop up in our mind is what can give rise to the liability of a D&O, or what does this policy type cover?. It is very straightforward aspects such as negligent advice or misstatement, acting ‘ultra vires’ (beyond the powers), failing to disclose the full extent of the director’s interests, errors of judgment, negligent supervision of delegated authority, imprudent investments, excessive borrowing, failure to arrange proper insurance, (MITC, 2017).  The Enron Financial scandal case of 2001 is a good example that can be used to exemplify.


Nonetheless, the D&O liability insurance policy does not cover all acts and omissions of the D&O. The exclusions are covered by tailored insurance cover for example the exclusion for, fraud and dishonesty are covered by a fidelity guarantee insurance policy. Other exclusions include; improper personal gain, insured v insured, pollution, outside directorships, bodily injury or damage to tangible property, computer date recognition, deliberate acts, fines & penalties, claims brought outside a recognized jurisdiction, (MITC, 2017). 


Why is this policy important


Directors and Officers (D&O) Liability insurance is aimed at protecting the directors and officers of a company, trust, organization, etc against their liability for financial loss suffered by third parties. Whilst a company’s liability may be limited, the personal liability of a director for their wrongful acts is not. This is because, in acting as the company’s ‘mind and will’, the directors may incur a common law personal liability for the wrong done by the company, (MITC, 2017). 


Directors and officers are sued for a variety of reasons related to their company roles: There are several reasons brought forth by Business owner's Playbook, (n.d.), to justify why D&O’s of institutions need liability cover. D&Os may find themselves in one or more of the situations: Breach of fiduciary duty resulting in financial losses or bankruptcy, Misrepresentation of company assets, Misuse of company funds, Fraud, Failure to comply with workplace laws, Theft of intellectual property, and poaching of competitor’s customers, lack of corporate governance. 




Take Away

Liability insurance arises as a result of moral hazard. MORAL HAZARD is the risk arising from the character or circumstances of the policyholder or his employees. Also, it is important to know the following: the history of liability insurance, who is a D&O in an Institution and the various types, what the D&O policy covers and what it excludes, and finally the importance of this insurance cover to us and our businesses. 




Newton Bezeng

Founder BeNew Insurance

Email: newtonbezeng@outlook.com

Website: https://benew.business.site

Blog: benewinsurance.blogspot.com

Facebook: https://web.facebook.com/Benewinsurance

LinkedIn: https://www.linkedin.com/company/benew-insurance

Twitter: @newtonbezeng




References 

-Business owner's Playbook, (n.d.). The Who, What & Why of Directors & Officers Insurance.

https://www.thehartford.com/management-liability-insurance/d-o-liability-insurance/explained

-Directors and officers liability insurance. (26, October 2020). In Wikipedia. 

https://en.wikipedia.org/wiki/Directors_and_officers_liability_insurance

-Greenberg, M. J. & Dean, D. B., (1975) Corporation and Security Law: Protecting the Corporate Executive: Director and Officer Liability Insurance. Marquette Law Review.  

https://core.ac.uk/download/pdf/148689924.pdf

-Malta International Training Center, (MITC), (2017). Liability Insurance for Commercial Enterprises. Module 4 coursebook.

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