Directors and offices can be held legally responsible if the correct procedures have not been strictly followed and an employee has been dismissed unfairly.

In the second installment of our new practical advice columns answering common insurance queries, Nicholas Marshall from specialist insurance broker Reason Global answers the question:

When is Directors and Officers Liability Insurance necessary?

The issue of directors and officers (D&O) cover is one fraught with myth. Firstly, it’s a common misapprehension that it’s only a necessity for large or limited companies. This is not the case. Claims can be levied against directors and officers in businesses of any size and the same rules apply to SMEs as they do to huge multinational corporations.

Some companies neglect D&O insurance under the impression that directors have limited liability. In fact, directors can find themselves personally liable to not just the company but also to its shareholders, investors, creditors and the general public. As a result, their personal assets can become exposed and they may even face criminal sanctions.

Typical examples of issues that directors and officers can find themselves held legally responsible for include:

Whistle blowing

• Law: Employees must not be penalised for informing on their employer.
• Claim: An accountant won his claim for unfair dismissal after he was sacked for warning directors that his former CEO had claimed a substantial amount in cash advances without receipts.

Sexual Discrimination

• Law: Employees must not suffer gender discrimination or sexual harassment.
• Claim: A sales worker successfully sued for sexual discrimination after she was told she was perfect for the job due to her ‘blonde hair and long legs’.

Unfair Dismissal

• Law: Employees must not be dismissed unfairly and the correct procedures must be strictly followed. 
• Claim: An IT manager was able to win his claim after his employers failed to follow statutory procedures when dismissing him.

Disability Discrimination

• Law: Employers must be fully adaptable to employees’ disability needs.
• Claim: A secretary won her claim after being dismissed for not processing information quickly. She had previously declared that she had dyslexia, but the employer did not make any allowances for her condition.

All the above claims can be covered through a solid D&O insurance policy, thus avoiding expensive legal fees and personal liability. However, when seeking out D&O cover ensure it:

• Fully compensates the company where they are obligated to reimburse its directors and officers under its constitution
• Covers the legal liability of directors and officers
• Provides protection for all directors and officers of the company across the board
• Covers the legal costs and expenses in respect of:

- Any investigations; 

- The defence of any legal action seeking disqualification of a director; 

- Extradition proceedings (including appeals).

Companies should also be mindful that if an action were to be brought against the company rather than an individual, standard D&O policies would not apply. For this, your D&O policy must include an Entity Defence extension. This will cover legal costs and expenses for cases such as identity fraud, investigations, corporate manslaughter, breach of contract and pollution.

I’m often asked whether or not I believe D&O insurance to be a worthwhile investment and my answer is always an unequivocal yes. With the increasing volumes of legislation in place favouring claimants, it’s worth considering the cost of the D&O cover against the potentially significant legal and personal costs associated with defending yourself against a claim.

For more information from Reason Global go to www.reason-global.com.