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Do You Need Directors and Officers Insurance? Here’s 4 Reasons Why You Do

13 Jul

When considering whether to purchase Directors and Officers Insurance, there are many common misconceptions that people make. These mistaken beliefs include not thinking that you will ever be in a position to be sued by an employee or stakeholder, and that D&O cover is only necessary for very large or publicly-traded businesses and therefore you are not at risk if you run a small business.

Whatever the size of your business, the COVID-19 pandemic has affected most aspects of how it performs and operates, including financial impacts, employee health and safety and the many other risks that have arisen since the spread of the virus.

In this uncertain and rapidly evolving situation, directors and key managers not only need to adapt and manage the company’s response to the current crisis, you also need to protect yourself and your business in the event of a claim being brought against you.

What is Directors and Officers Insurance and Do You Need It?

As a director or key manager, you have specific duties and responsibilities to your employees, investors, shareholders, regulators and members of the public that you have to carry out. If you are found to have acted outside of your job description or terms of reference, or have been negligent, you could have civil, criminal or regulatory proceedings brought against you.

Directors and Officers Insurance will cover the cost of compensation claims made against you, including the cost of defending these proceedings and if your defence is unsuccessful, any compensation costs that arise.

Without D&O cover, you will more likely be unable to defend yourself against civil proceedings, losing your position and even criminal prosecution. Below, we’re sharing four reasons why you should consider D&O Insurance.

1. Claims Against Directors Are Increasing

Employment practice claims have been on the rise for a number of years, especially in relation to equality, disability discrimination and sexual harassment. A higher awareness of mental health and increasing stress levels, combined with the abolishment of tribunal fees in 2017, which has made it easier for employees to bring forth a claim against employers, have contributed to this increase. In fact, single Employment Tribunal receipts rose by 25% in the fourth quarter of 2019, compared to a year ago.

Not to mention, as our working lives adapt to a challenging landscape, we could see a rise in issues specific to the COVID-19 pandemic. These could include claims relating to dismissals, working hours and performance. D&O Insurance will protect you from employment practice claims that could and do result in staggering settlements.

2. Protection in the Worst Case Scenario

Claims can come from absolutely anywhere, not just your employees. For example, if your investors lose value in their shares as a result of alleged misconduct by you or your business, they could turn to the courts to pursue compensation. Creditors may seek legal action against you if you are headed towards bankruptcy or insolvency and they feel that you have not acted in their best interests.

Not to mention, investigations and fines imposed by regulators and bodies are increasing and are one of the leading causes of claims. With the likes of the Health and Safety Executive ramping up their spot inspections to ensure that businesses are taking the necessary steps to prevent the spread of COVID-19, now is a good time to secure D&O Insurance in case the worst happens.

3. It’s Not Just the Business That’s at Risk

You may think that despite making the key decisions and running your business, as a director you cannot be held personally liable if a claim is brought against you. However, that’s not the case. If you fall short of the obligations that your position demands, your personal assets, such as money or property, are at risk of being used to meet any costs or fines.

Recent research found that one in four company directors have been subjected to at least one legal action from employees, shareholders or regulators. The Companies Act 2006 alone shows that there are over 200 offences for which a director may be held personally liable.

As directors and officers take on more accountability whilst protecting businesses from emerging risks, such as the COVID-19 pandemic, cybercrime and GDPR, D&O Insurance is becoming increasingly important. For example, if your business breaches the PECR rules on the use of unsolicited direct marketing and automated calling systems, you will be personally liable and could face fines of up to £500,000.

4. Prepare for the Unexpected

A common misconception is that D&O claims are covered under other liability policies, such as Professional Indemnity, but that’s not true. Alleged misconduct by directors or businesses is not covered under any other liability policy.

Regardless of the size of your business, employment practice claims are a real threat. Small businesses are just as vulnerable as larger companies, yet only half of SMEs in the UK have D&O Insurance. Smaller businesses have the same risks, yet they are often without in-house HR or legal teams and therefore could end up spending tens of thousands of pounds defending themselves.

According to the British Chamber of Commerce, employers are facing an average cost of £8,500 brought on by claims by unhappy employees. D&O Insurance will cover your defence costs and damages in the event that a claim is brought against you, even if the outcome doesn’t go your way.

Need Advice?

If you have any questions or would like further information about Directors and Officers Insurance, contact us today on 02920 853788 or at contact@thomas-carroll.co.uk.

Our specialist broking team are fully operational from home and on hand to help with any queries you may have.