Directors’ and Officers’ insurance compensates directors and officers for loss, including legal costs, where they have committed a ‘wrongful act’ while carrying out their role as managers of the corporate entity.
A wrongful act is usually defined as an error, mis-statement, misleading statement, conduct, omission, neglect or breach of a duty of care.
This insurance is a personal cover for directors and officers. The only indemnity available to the corporation is for its obligations to reimburse legal costs for its directors and officers should they be found not liable.
Not only are there are specific duties and responsibilities imposed on directors as to how they conduct a business, they have more than 600 laws and regulations they must follow. This is on top of the responsibilities imposed under common law and contract conditions. In nearly all circumstances, the individual director or officer will be made personally liable.
Directors & Officers Liability insurance covers the decisions made by people involved in managing and running an organisation. It is important to note that it covers the individuals not the company. The people generally covered include:
As per Section 199 of the Corporations Act, the Company can indemnify the individual Directors for reimbursement of their legal costs only where the Director has not been found liable and then they can claim under the Company Reimbursement section.
Additional cover can be purchased to insure for:
A guide to determining the amount of insurance cover needed is to estimate the worst possible outcome of a mistake made by a director or officer of the company.
Other factors to be considered are legal trends and the effects of inflation on the settlement amount if the claim is not resolved for some years. This last point is important as the amount of cover purchased in the year that the event was reported may not be sufficient if the claim does not settle for many years.
The policy limit selected includes cover for costs and expenses incurred in the defence of the claim. For example, if the policy limit is $5 million, and the claim settles for $4.8 million with defence costs of $700,000 having been incurred, the directors and officers would be uninsured for the amount in excess of the $5 million policy limit (i.e. $500,000).
An insurance broker’s role is to act as your representative and work in your interests, seeking the best cover at the best price for you from market knowledge. Call a good one. Call CPR – Experts who will save you.