When we begin our careers as employees, we aim to improve our jobs and keep working to grow. No one wants to be stuck in one position for their whole life. That’s why when we hear the word ‘Promotion’, our eyes light up and know the hard work has paid off. The harder and smarter we work, the more promotions we reach until we get that fantastic manager or CEO title. These functions come with great responsibility and authority. These roles require a range of skills and experience to supervise a team and be a leader. Even for the most gifted individuals, becoming a leader is a demanding and challenging continuous learning and self-development journey. Nevertheless, millions of employees reach this level, and many even establish their own companies.

Managers, CEOs, Human Resources and more-These roles fall under the category known as Directors and Officers (D&O). Directors are responsible for supervising, managing and directing the company’s direction (at the top of the company board). Corporate officers are high-level management executives hired by the business’s owner or board of directors, for example, CFO, Human resources manager, IT managers and more.

D&O’s are in charge of a team and the extensive range of duties that affect the company and stakeholders. It is a title that comes with numerous amount of risks. Mistakes will happen; sometimes, the mistakes lead to lawsuits against the directors or officers. D&O insurance will provide cover to any team member who falls under the D&O category and faces a claim.

This article will explain in depth why every company with managers and CEOs needs D&O insurance.

What is D&O Insurance?

As Directors or Officers, you are directly and personally liable for any decision you take for the company. Knowing that there is a large number of third parties that may sue you for your work decision. These third-party members include your shareholders, your employees, government, clients and more.

D&O insurance policies offer liability cover for company managers to protect them from claims which may be an outcome of the decisions and actions taken by performing their regular duties. Therefore D&O insurance has become a regular part of companies risk management. D&O insurance will cover the cost defence against the claim, and if the case is lost, the insurance will pay for the financial loss. In addition, D&O insurance will protect the Directors or Officers from all possible lawsuits that may affect them and their company due to alleged wrongful acts. Although illegal actions or illegal profits are generally not covered under D&O insurance.

How will D&O Insurance Protect your Personal Liability?

Fiduciary DutyBreaches of Fiduciary Duty

When a client pays for a product/service from a company, it is the duty of the company to provide what is paid for on the arranged date and in the desired condition. This is known as a ‘Fiduciary Duty’. In the same spirit, the duty of a manager is to act in a way that benefits the company. The three fiduciary responsibilities are the duty of care, the duty of loyalty, and obedience.

 

  • Duty of Care: Duty of care means that directors and officers must give the same care and concern to their board responsibilities as an employee would. (attending meetings, committing to goals and contributing to company success)
  • Duty of Loyalty: D&O must place the company’s interests ahead of their personal interests at all times. Publicly disclosing any conflicts of interests and not using board service as a means for personal or commercial gain.
  • Duty of Obedience: the D&O must ensure that the company follows all related laws and regulations and doesn’t engage in illegal or unauthorised activities.

If a director or officer accidentally breaks one of these fiduciary duties, they will be liable for the consequences. A breach of fiduciary duty happens when a company fails to act responsibly in the best interests of stakeholders. This can result in the stakeholder suing the D&O.

An example of a breach is “The vice president (VP) of a manufacturer determined that diversification into a different product line presented sales potential for his company. Instead of presenting that opportunity to his employer, the VP shared it with his brother who formed a new company to produce that product. On behalf of the company, a shareholder sued the VP alleging that he wrongfully took advantage of an opportunity belonging to the corporation. The suit eventually settled for $2.5 million.” Although, this is a breach of fiduciary duty as the VP must present that idea to his own company and share the profit with his company, it breaks the duty of loyalty.

If the VP were covered with D&O insurance, they would pay for the settlement cost in the example mentioned. This is how D&O insurance can save a  director or officer, by paying for all the defence of claims, any financial loss or possible compensation costs to the clients.  It is vital to be protected against any breach of fiduciary duty as the director or officer may not intend to break any of the duties and may occur due to a mistake, miscommunication or delay.

Misuse of Company Funds

 Clients trust the business enough to pay money in exchange for products or services. Therefore, businesses should use the money to operate. However, one may encounter managers or directors that mistake their own money with the company’s funds. This is the most common situation of misuse of company funds and can harm the business and creates trust issues in the organisation.

An example of misuse of company funds would be a director taking money out of the company every month to invest in his wife’s new business. The money belongs to the company and other managers start to notice that the company suddenly does not have enough money for their departments. The department managers have the full right to report to the board, who can sue the director for misuse of company funds.

D&O insurance-Misuse of Funds

Nonetheless, in some cases, it can be unintentional. For example, directors or officers may not have the time or expertise to keep good records, and personal expenses get mixed up with business expenses.

It can ruin a business and its reputation. Especially if the misuse of funds leads to the company declining or going bankrupt, this will be noticed and allow shareholders and clients to sue the company. This is when D&O insurance can help the director or officer by providing legal costs to a director/officer to defend themself against civil and criminal proceedings. The cover will pay for defence proceedings and expenses related to the claim, as long as the wrongful act was not illegal. Without D&O, they would have to pay for all the claims, defence, resulting in a significant financial and reputation loss.

Failure to Comply with Regulations

Every business has some laws and regulations they must follow to operate in that country and industry. These laws and regulations are taken very seriously by the government, as well as regulatory organisations. Laws and regulations can range from labour laws, health safety regulations and common criminal laws. However, any director, officer can accidentally test the limits of laws due to the pressure put on the business to perform. For example, an F&B business may be performing very well and do not have enough staff for the night shift; they would have to request the day staff to do the night shift too, resulting in the staff working for 14 hours in the day.

Technically this will be breaking labour laws, as an employee is meant to work only 8 hours in a day and could sue the company if the staff wanted to. This can be very common and the responsibility will be the Human resources manager. The HR manager will have to pay the consequences and be fined, even if the director was the one adding the pressure.

The D&O insurance is a great cover to have in these situations. The insurance can protect the director or officer who is being fined and accused of breaking the law or regulation. The D&O insurance will cover any loss related to the claim and also may cover the fine related (civil fines and civil penalties). Therefore in the example, the HR manager will be safer with D&O insurance, which will cover the defence costs and also may cover the fines against her. Fortunately, the manager will get a chance to explain that the law was broken unintentionally for business reasons. This is why it is essential to have D&O insurance, as one never knows when they might face a claim regarding regulations. 

Lack of Corporate Governance

D&O insurance-Corporate Governance

In a firm, the directors and managers make sure the employees are treated equally and safe. It is a part of corporate governance and is one of the most critical factors in running a business. Corporate governance is the arrangement of rules, traditions and processes by which a company is directed and controlled. Ideal corporate governance involves managing the equal interests of employees, shareholders, customers and the government. Lack of governance is when a company does not balance these interests and focuses more on financial factors.

Lack of governance can allow an employee to sue the director due to bad working conditions or discrimination in the company. A popular example of lack of governance is managers or directors discriminating against employees due to gender, where female employees are paid less than males. Gender discrimination can lead to a strong case against the manager and damage the company.

D&O insurance will still assist the manager while facing these claims. The insurance will cover any related costs regarding the claims in consequence of the lack of cooperate governance. Managers are protected by D&O insurance, they do not have to worry about handling a large team, as management can’t control everyone and mistakes or miscommunication is highly common. With D&O insurance, the lawsuit or claim will not financially affect the managers as much as it would without insurance cover.

 Do I need D&O Insurance?

D&O InsuranceEvery business should consider investing in D&O insurance, including non-profit organisations. Your company does not have to have an income of millions for your directors and officers to be personally sued over their management of company affairs.

D&O insurance will cover an extensive range of personal liability for any director and officer at duty. Insurance is crucial for members in these roles as they bear plenty of responsibilities and business plans don’t always go as imagined.  Any mistake under your leadership will put you in danger, and you will face the claim. With D&O insurance, you and your officers can focus more on what matters to the business.

Hence it is crucial for any company, small or big, to purchase D&O insurance to protect managers, HR and yourself from these risks and any unforeseen mistakes. D&O insurance has its limits, depending on the case and seriousness of the claim. D&O insurance will not always be able to protect you from imprisonment or any other intense lawsuits where the manager is evidently at fault. However, it is the best insurance to invest in to deal with surprise lawsuits. With D&O insurance, directors and officers can avoid financial loss, company shutdowns and unwanted negative reputations.

To Learn More about D&O Insurance and get the best coverage for you and company managers, contact Red Asia Insurance.

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