There are a few different ways to protect your business. While interruption insurance is the suggested way to get your business covered in case of fire, earthquake, flood, vandalism and similar scenarios, there are considerable risks involved with being a company director or officer as well. If you’re wondering what is the best way to protect your personal assets, you may want to consider directors liability insurance.
D&O (directors and officers) liability insurance is insurance coverage intended to protect individuals from personal losses in the event they are personally sued for actual or alleged wrongdoing when managing a business or another type of organisation. This insurance can cover the legal fees and other costs the organisation may incur as a result of such a suit.
Understanding D&O Insurance
D&O insurance applies to anyone who serves as a director or an officer of a for-profit business or non-profit organisation. It’s the financial backing for a standard indemnification provision, known as the hold harmless provision as well, which shifts potential costs from directors and officers for losses related to an action they took on behalf of the business or the organisation they’re serving.
If you’re a company director or an officer, involved in the management of a company, you carry specific responsibilities. Those responsibilities may leave you personally liable if you breach them, so to protect yourself and the company you may opt for directors liability insurance. The changing regulatory environment in Australia has increased the operating risk for all businesses, so you need to ensure the financial wellbeing of the company is safe, as well as your personal assets.
Directors usually don’t need to pay the debts of the company and the company structure keeps directors and company assets separate. As a director or officer, you’re at risk of being held personally liable for business decisions made in good faith and you might still be fined if ASIC (the Australian Securities and Investment Commission) investigates the company.
Claims can arise by a variety of sources, including, but not limited to shareholders alleging that the directors mismanaged the operations of the company and its funds, creditors alleging that the director allowed the company to trade whilst knowing it could not pay its debts, employees alleging discrimination, harassment, defamation, misleading misrepresentation breach of employment contract, wrongful discipline or else. Also, directors and officers may be personally liable for breaches of hundreds of statutes.
If you breach a duty or fail to meet an obligation, you may be required to pay compensation to an aggrieved party, a fine or penalty, legal costs of the other party and more. Even if you are not found to be liable, the cost of defending yourself can be significant, so you need liability insurance that can help you protect yourself from reputational or financial costs.
Depending on the size of your business, you can get the coverage that’s right for you. It’s always a good idea to consult your broker about the best option and turn risk into results. The role of the broker is to keep you informed and properly protected at all times. With the insurance broker acting on your behalf, facing the claim becomes less of a headache.
The first step is understanding. Your insurance broker will get to know you, your needs and your business’s structure. Then, they can identify the key risks and gaps in coverage that may appear. From there, they can develop robust risk management and insurance response to the specific nature of our business and look for the best available cover.
Key Points to Check in the Directors and Officers Insurance Policy
The level of protection depends on the scope of the policy. Always make sure you have a copy of the actual insurance policy, not just a summary. Review your policy carefully, including every year when the premium is due. Check if the cover is broad enough and if the maximum limit is appropriate to the company size. Some other issues to consider when reviewing your insurance policy are the following.
Check if Your Role is Covered
It’s better for the policy to state roles, not specific people, to make sure that any new person in the role is covered by the insurance. The policy should cover all current and former directors (for seven years after their role as directors), the company secretary and other executive officers.
Check How Long Does the Cover Last
A former director can be sued for up to six years after they’re no longer part of the company. That’s why the insurance must continue after you leave the office for at least seven years afterwards.
Check the Insurance Period
Directors and officers insurance usually runs year-to-year. It may be a good idea to have it start and end with the calendar year, which gives you enough time to consider appropriate overage each year.
Know Your Duties and Obligations
Almost every insurance policy includes a duty of disclosure, meaning that you need to disclose any matter that’s relevant to the insurer on whether they should insure you and the company. It continues for the life of the insurance policy, including every renewal. If you don’t disclose key information, the insurer may reduce the insurance payment, refuse to pay or even cancel the policy.
Each director and officer should have a separate insurance contract, so if any director fails to disclose key information, it will not affect the rights of the others. Also, check if the policy states that the company can run or take over any lawsuit against you. You may want to negotiate into the deed that the company’s right to control the case is subject to considering your reputation and it may potentially affect your future career.