In the large majority of cases the responsibilities, duties and powers that a director or officer will have will be set out in the job description or terms of reference. This means that legally the director or officer can be held responsible for issues involving data protection, fraud, negligence, health and safety and the maintenance of properly kept accounts.
Directors Liability Insurance is a form of liability insurance that is payable to the these officers and directors, or to the company itself, to provide cover for damages or the cost of legal defence if a legal challenge is made against the director on any of the above grounds.
Directors Liability Insurance has come to be broadly associated with the idea of management liability insurance, which allows for the cover of both the corporations and the management structure’s liabilities.
If the director or officer is discovered to have acted outside of their brief or the terms of reference by accident or by negligence, this could result in a legal claim being made against that director or against the company as a whole. In this situation Directors Liability Insurance will cover the cost of this claim as well as any compensation payments and legal fees that are incurred by the director, officer or company. The cover supplied by Directors Liability Insurance will not cover any of the aforementioned legal costs if the actions of the directors that are the subject of the legal challenge are found to have been deliberate.
So for example, if the director fails to inform their employees of health and safety regulations because they were always running late between meetings, this is negligence and will be covered by Directors Liability Insurance if an employee has an accident at work.
If the director is found to have deliberately engaged in large scale fraud with the company’s money, this is a deliberate action and will not be covered by Directors Liability Insurance.
The main sources of Directors Liability Insurance claims come from shareholders, shareholder-derivative actions, customers, regulators and competitors (who may challenge the company on anti-trust of fair trading grounds).
The exact level of coverage that a Directors Liability Insurance is very heavily affected by whether the company in question is publicly of privately traded, so it is important to perform adequate research.
Directors Liability Insurance is generally purchased by the company even if it will only be of any use to the directors or the officers. The companies do this for various reasons but the most common id so that the company can entice and then retain directors in the first place. It is also relatively common for directors and the company to split the cost if the countries legal system does not allow the company to purchase the insurance by itself.
