Businesses need insurance that provides the best liability protection-Director and officer (D&O) insurance and professional indemnity (PI) insurance. Unfortunately, there is common confusion between these two insurances.
They both have their specific cover and conditions. Each insurance covers lawsuits from a different party regarding the duty performed. As a business and managers can be victims of lawsuits at any time from customer/clients to board of directors and customers.
Hence, this article will explain the difference between D&O and PI insurance and why businesses may need both.
What is D&O Insurance?
Directors and officers are responsible for pushing the company further and performing duties expected by the board of directors, shareholders, employees and the government. In addition, the members affected by the businesses’ actions and can sue the company for their loss.
Therefore, D&O insurance will financially cover the directors or officers from all possible lawsuits that may affect them and the company due to alleged wrongful acts (lawsuits from internal members). In addition, the insurance will provide the cost of defence, and if the case is lost, the insurance will pay for the financial loss.
D&O Insurance Common Claims Include:
Breaches of Fiduciary Duty: the company’s duty to provide what is paid for on the arranged date and in the desired condition.
Misuse of Company Funds: When managers or directors mistake company funds with their own( on purpose or by accident).
Failure to Comply with Regulations: Every business has some laws and regulations they must follow to operate in that country and industry (E.g. Laws, Health and Safety regulations).
Lack of Corporate Governance: Corporate governance is the arrangement of rules, traditions and processes by which a company is directed and controlled.
An example of a D&O claim – is when an employee alleges the business discriminates against employees due to gender, where the company pays female employees less than males. Even if a claim is not valid, the company will have to deal with the lawsuit, and the cost of defending can still be high. D&O insurance will pay for defence, financial loss and settlement costs.
What is PI Insurance?
Various businesses provide advice and consist of professionals providing specific advice to clients and customers. Such as doctors, financial advisers, engineers, architects, teachers, and many more.
The professionals are liable for how the advice impacts the client. There are moments when a professional may make a mistake, which will harmfully affect the third party. A client or customer can sue the company if they feel the professional’s duty has negatively impacted them.
Professional indemnity insurance (PI) is also known as errors and omissions insurance (E&O). Therefore, PI insurance will cover when a third party sues a business or professional induvial due to an error. In addition, the insurance provides coverage for professionals and companies to protect against claims of negligence from clients or customers.
PI Insurance Common Claims Include:
Negligence: When a professional or business has failed to carry out the duty of care to clients.
Misrepresentation: When a business doesn’t provide the level of services they promised the clients.
Inaccurate advice: When a business does not provide the information clearly, resulting in harming the client.
Intellectual Property Claims: When a business uses or copies another business’s work or idea
PI Claim Example
For example, a marketing company may accidently print a client’s competitor’s number on an advertisement. The client will have the right to sue themarketing business for negligence. The insurance will pay for legal and settlement costs related to the claim/lawsuit.
Difference Between D&O And PI Insurance
D&O insurance covers only managers and directors for claims related to their work and duties to the business.
PI insurance covers any professional and business from third-party claims regarding their service or advice.
How Do D&O And PI Insurance Help Businesses?
D&O and PI insurance are necessary insurances every business should have to protect their managers, employees, and overall business from surprising claims. Furthermore, the insurance provides financial and reputation cover. As claims can arise from anywhere, these insurances are the only way a company will be safe from the financial damage they bring. In summary, how careful a business or professional is- mistakes will happen and may lead to lawsuits. Hence, it is better to be insured now than suffer in the future.