Directors & Officers insurance – Modern risk exposures for board members

Sep 21, 2022

Directors and Officers insurance protects the management of your company from liability claims arising out of business decisions and actions.


It is no secret that your company needs strong leaders and board members in order to grow. The problem is when these leaders make decisions with legal implications that could put them at risk of personal liability. This is when Directors and Officers (D&O) claims can begin rolling in.

D&O coverage provides your executives with the security, assurance, and peace-of-mind that their personal assets, including their homes, are protected in the event of an unfortunate incident within the company.


Who is Covered?


D&O policies typically cover past, present, and future directors and officers. Based on the company’s operations and size, additional personnel can be added to provide coverage for management committee members and supervisory board members. Corporate trustees of superannuation money and any other employee who has the authority to manage, direct, and guide the company, may also be covered.


D&O insurance has seen significant price increases and a reduction in availability for listed companies.


A host of factors have contributed to the heightening litigation risk. These will be discussed in this article.

Companies must arrange D&O insurance coverage to protect their directors and officers. Without this, it would be difficult to secure their services due the potential for claims to be made against directors or officers, which can result in substantial damages, financial penalties, plus high-profile and contentious third-party litigations.

Today, directors have additional responsibilities beyond their normal day-to-day duties. They are responsible for the company’s governance in relation to risks like climate change, cyber-risk, and data privacy. For large ASX listed companies, there is also the  continual risk of class action lawsuits.

Class actions can be costly, both from a monetary perspective and in other ways, such as trust loss from its shareholders. It is crucial that company directors can make informed decisions for their companies in this context without fear of being held personally responsible. Inability to make informed decisions could have serious consequences. This could impact on business development, the economy, and the wider community. D&O insurance plays an important protection role. It transfers a director’s personal responsibility risk to the insurance company, subject to the terms and conditions of the policy.


ESG Related Litigation Risks


Companies are now facing new ESG (environmental, social, and governance) legal risks as the scope and types of ESG issues continue to change. A multitude of ESG Ratings Agents are releasing reports to investors that purport to “score” ESG performance using varying and opaque methodologies. Litigation is also exploding for all three ESG pillars.

Recent shareholder litigation sought to hold directors and companies accountable for “green-washing” misrepresentations. “Green-washing” refers to the exaggeration of a company’s sustainability efforts through marketing materials and/or disclosures. Shareholders also filed lawsuits against companies claiming misrepresentations on climate change risks or mitigation measures.

Investors and shareholders increasingly look at companies’ compliance with ESG-related statements. This includes diversity and inclusion as well as engaging in appropriate governance to ensure ESG-related social goals are met. Shareholders are investigating legal action against corporations more regularly, accusing them of “social washing” and failing to honour their diversity commitments.


Why Buy D&O Insurance?


Let’s look at why D&O insurance is important for most businesses and the benefits it can offer.


Provide Legal Cost Coverage


Directors and officers have a lot of power and responsibility. They make crucial decisions that impact operations, finance, personnel, etc. This puts them at risk of a wide range of litigation issues. The types of suits brought against directors or officers can range from smaller claims brought in by dissatisfied workers to large securities class action claims brought in by the company’s shareholders.

If partners, third parties, or investors claim that the company’s executives misused company funds, omitted or misrepresented company assets, they may be held accountable even though they acted on behalf of the company.

Additionally, if an organisation offers benefits packages to its employees, its leadership team has a fiduciary obligation to manage them to the best of their ability. Employees or government agencies that claim otherwise will be able to sue.

Public companies can also be subject to government regulation. Enforcement actions by government agencies against your company and management team can be very costly. They could also trigger formal legal actions from the government and private sector. If the government, or an independent agency, finds that your company has failed to adhere to workplace laws and/or if you have a poor corporate governance record, you can expect to be subject to regulatory actions and possible fines.

These types of problems can be solved quickly and easily if you have the right D&O coverage. Your insurance provider will help you deal with the lawsuit, find the best defence team, and cover the expenses.


Attract Potential Investors


In order to expand and grow, organisations may need outside funding. Investors will need to protect and oversee their investments. Investors will often request a place on the board of directors. Investors will favour companies with strong D&O insurance policies to reduce the risk of lawsuits.


Bankruptcy Protection


The right D&O policy can be crucial if your company is going through bankruptcy.

Although bankruptcy offers a certain degree of relief and protection against litigation, the directors and officers of the company may still be at risk. Various parties could blame the leadership of the company and their decisions regarding bankruptcy. They may demand repayment of the company’s obligations and debts.

Directors and officers of bankrupt organisations could be sued individually or collectively. The company cannot help them defend themselves, and they are no longer able to insure them. In this case, a good D&O policy could provide protection for the directors and executives.


Cyber Breaches D&O Coverage


Cyber-attacks are a growing threat. They can cause significant damage to organisations and third parties.

It is difficult to determine who is responsible for the breach and how it affected people. Customers and investors will expect businesses and their managers to take adequate cybersecurity measures.

If the affected parties feel that management did not reduce cyber risks or protect their systems, they can hold directors and officers personally responsible for any damages.


Trident Insurance Can Help You Get the Right Policy


D&O insurance can be a powerful financial tool to reduce risk and give your officers and directors the confidence to make difficult, but necessary decisions to spur growth. You can use it to strengthen your financial planning and eliminate the concern that you might need a large amount of money to fight potential litigation.

If you would like to discuss your insurance requirements, we recommend contacting our insurance consultants.

Feel free to reach out to our insurance expert today for more information.