Directors and Officers are responsible for overseeing and guiding some of the most respected organizations and industries in Barbados. However, their position of leadership often put them at personal and financial risk. According to new legislation such as the Safety & Health at Work Act 2005, Occupational Pensions Benefits Act Cap. 350B and Employment Rights Legislation, Directors can be legally pursued, fined or imprisoned in the event of any negligence or non-compliance, even if unintentional.
No Director is immune from the risk of being sued, which can arise from a variety of sources including shareholders, employees, the general public and third parties, customers, or government agencies. While Directors might believe that general liability insurance would protect them or that the incorporated company would provide some level of indemnification, none of that is guaranteed. Some public liability policies do not cover lawsuits, and for various reasons, some companies might be unable or unwilling to offer legal defence or cover the cost of claims. So where does that leave the Director? In a position where they are personally responsible for funding their defence, and with their personal assets exposed.
How D&O Insurance Protects Directors and Their Assets
To minimize the risk and avoid having personal assets on the line, Directors and Officers can purchase Directors & Officers (D&O) insurance. The policy is intended to protect directors and officers (and defined managers) against the consequences of actual or alleged wrongful conduct when they are acting as company executives in the scope of their duties. Directors & Officers (D&O) insurance also serves to protect the company and its bottom line, by reimbursing legal defence costs.
Directors and Officers (D&O) liability policies provide three distinct coverages. The policy pays for defence costs, any financial losses and court awards up to the limits of the policy.
- Side A is the liability coverage for each director and officer of the organization.
- Side B is corporate reimbursement coverage, which reimburses the organization for any payments that it is legally obligated or permitted to make in indemnifying its directors and officers for liability claims.
- Side C, commonly referred to as ‘entity securities coverage’, is coverage for the organization for claims relating to the securities of the organization.
Why Small Business and Outside Board Directors Require D&O Insurance
A common misconception is that Directors and Officers liability insurance is only required by large or public corporations with complex boards and many shareholders. This is not true; small businesses can encounter many of the risks that larger corporations do such as unfair dismissal, and law suits by government agencies. The principal difference, which coincidentally increases the risk, is that small businesses may not have access to an in-house compliance, legal or human resources department to support regulatory procedures and offer sound defense for the claim. Small businesses are also less likely to have the funds to support protracted legal defense of their company or directors.
If you are a director sitting on an outside board, you should also consider insisting on the coverage for your own protection. Many directors and officers volunteer their services to non-profit organizations, and can be personally named in a lawsuit against the non-profit such as alleged fraud or financial mismanagement. A number of attorneys also offer their services to several boards. If they have their own company coverage, these boards can be noted as outside directorships, but otherwise, they should insist on individual Directors and Officers liability insurance policies for each company.
Exploring the Most Common Claims Faced by Directors
A Director and Officer claim includes any written demand alleging a wrongful act by a director or officer in his or her capacity, seeking monetary or non monetary damages. 40% of Directors and Officers claims are related to employment or human resources (HR) actions, where conduct rules or regulations were not adequately applied and enforced. However, other claims can include any of the following:
- Employment practices such as discrimination, wrongful termination and HR issues
- Failure to comply with regulations or law
- Shareholder actions
- Reporting errors and inaccurate or inadequate disclosure in company accounts
- Wrongful denial or termination of credit to any customer or client
- Violation of the anti-trust regulations or practices or unfair methods of competition
- Violation of a loan covenant
- Exorbitant dividend payments or profit-sharing contributions which were made by the company
- Improper loans made to Directors or Officers
Under the D&O policy, the claim has to be first asserted or “made” against the insured individual during the policy period. This is why Director and Officer insurance is generally referred to as “claims made” coverage. Some Director and Officer policies also require that the claim be reported to the carrier during the same policy period. This is referred to as “claims made and reported” coverage. Policies require reasonably prompt notice within the policy period. Failure to provide timely notice can and will result in loss of coverage.
Understanding What Is Not Covered under D&O Liability Insurance
A Director and Officer policy does not cover intentional, fraudulent or criminal (illegal) acts of a Director or Officer. However, the policy will cover the innocent directors if they are named in the action as co-defendants.
The policy also does not cover activities more specifically covered by other policies such as errors and omissions which is covered by the Professional Indemnity policy form. Other common exclusions of the D&O policy include fraud, intentional non-compliant acts, illegal remuneration or personal profit, claims made under a previous policy, and claims covered under a more specific policy form.
Another point to note is Insured vs. Insured claims. The Director and Officer policy is intended to function as third-party coverage or to insure claims made against the directors and officers by outsiders or third parties. It is not intended to respond to claims by the insured directors against themselves, such as director bringing action against another director.
Are You Properly Covered for Director and Officer Liability?
Many Directors & Officers of limited liability companies believe that they are protected behind the veil of the incorporation. However, this has been proven not to be the case time and time again. While companies generally have provisions within their by-laws that provide for some indemnification to their directors and officers, sometimes companies are financially unable to provide protection or are unwilling to do so for other internal reasons. This leaves directors personally liable, relying on their own personal assets to pay for the costs of defence and any resulting settlement or judgment against them.