The Importance of Liability Insurance for Directors and Officers
Despite taking the required measures and steps, a simple mistake may expose you to civil or criminal penalties as a director if you are found to be personally liable. Any of these penalties may take away your assets or damage your reputation. It is best to think of ways to protect yourself beforehand - this is where liability insurance comes into play. Most companies have a Deed that can be used to indemnify their directors from possible litigation. However, Deeds are generally particular in the areas where it protects directors. As such, you may not get full cover for action/s you perform as director. There are also certain legal procedures the law does not permit a company from indemnifying its directors.
Some of the restricted penalties where a corporation could not offer indemnity to its directors:
Liabilities of the company or a related corporate body if the liabilities are deemed not to have arisen in good faith
The law prohibits the company to assume liability and pay a pecuniary penalty order
The company cannot indemnify directors for criminal activity
Defending proceedings when indemnification is prohibited
Defending proceedings brought by the liquidator or the regulator
For such areas, it is essential the officers of a company seek their own liability insurance coverage. Where claims are paid by the company, the insurance company may reimburse amounts already paid back to the company.
Liability Insurance takes care of three areas, namely:
Personal coverage of a director, if the company is restricted from indemnifying its officers and director/s
Reimbursement to the company in instances where it has indemnified its officers and directors
Offering protection against a loss, such as defending a security claim by one of the shareholders
The law forbids the company to pay for insurance coverage for a person who was a director or is currently a director, in cases where the person is involved in:
Willful breach of a certain duty
Improper use of position
Improper use of information
The insurance policy may be void to the extent the person is guilty of the above malpractices.
Selecting a Director and Officer Insurance Cover
There are several D&O policies in the market. When selecting which one suits you, consideration should be made at to the following:
Who is to be insured under the policy
The extent of the risks covered under the policy
What losses are covered under the policy and the amount covered
The exclusions that the insurer relies on to deny a claim
If legal costs will be paid by the insurer
Next Steps
Contact us if you would like legal advice on liability insurance and managing risk. Our lawyers at You Legal will be happy to assist you in whatever way we can. Alternatively, get a comprehensive guide on directors' obligations:
