Directors & Officers Liability - Why Purchase Cover?
Directors & Officers Liability insurance typically provides protection for claims brought against Directors and Officers for actual or alleged breaches of duty, misstatements, errors or omissions in their capacity as Directors or Officers. The policy can also provide cover primarily for legal costs where a Director or Officer is investigated by a regulatory body or government agency into alleged misconduct.
A common type of claim brought against a Director or Officer is for alleged nondisclosure or misrepresentation within a corporate document, such as Report and Accounts, Sale and Purchase Agreement relating to an acquisition, or a prospectus document used to raise finance. The third party typically alleges that had it been aware of the nondisclosure or misrepresentation at the time of agreeing to the contract, they may not have entered into a contract.
Another common area for complaint is where the share price drops significantly following a public announcement or Board decision of some kind. Aggrieved shareholders might take action to try to recoup their financial loss from the Directors & Officers. A claim of this nature sometimes takes the form of a derivative action which seeks to implement changes to the Company or punish the Directors or Officers.
Common parties who bring claims against Directors or Officers litigation are investors, regulators, employers, creditors, customers and suppliers.
When a claim is made against a Director or Officer, they first look to indemnification from their Company for the payment of the costs associated with their defence and any ultimate liability that may be imposed. Where coverage under the policy applies, the Company can then turn to its Directors & Officers policy for reimbursement of these costs. In some instances the Company will be unable to provide an indemnification (i.e., if the Company is insolvent, or unable to by law) so then the Director or Officer goes direct to the Directors & Officers policy for reimbursement.