Civil liability insurance for executives and directors. Guide to coverage and requirements

The professionals responsible for managing large companies face risks that are different from those faced by other workers. We are referring, for example, to potential lawsuits filed by shareholders, employees and the competent authorities. For this reason, it is advisable (and sometimes mandatory) for these individuals to take out civil liability insurance for directors and managers. But what exactly is it and what coverage does it offer? We will explain this in detail here.

What is directors and officers liability insurance?

Directors and officers liability insurance, also known in the sector as D&O  (Directors and Officers) insurance, is a policy that protects the personal assets of these professionals against potential third-party claims. As a general rule, it covers situations in which there is a possibility that they may commit errors or negligence in the performance of their duties and covers the costs of legal defence and any compensation they may have to pay up to a certain amount.

Common requirements for taking out a D&O policy

Obviously, every insurance company is different and has a certain amount of freedom to set the requirements for taking out D&O insurance. However, as a general rule, they usually establish the following:

• Solvency statement: the company must demonstrate that it has fulfilled its obligations to public administrations and private entities that provide it with financing and prove that it is in a healthy financial position.
• Turnover and size of the company: sometimes, companies set a maximum turnover limit, which is usually around £25 million per year.
• History of previous claims: if this is extensive or there are ongoing lawsuits, the insurer may refuse to issue the policy.

In any case, the company reserves the right to carry out a detailed study in order to assess the risk and decide whether it is a suitable option.

What does senior management insurance cover?

Generally, civil liability insurance for executives and directors offers the following main types of coverage:

• Civil liability: the most important of all. In this regard, the D&O policy covers compensation to third parties for financial damages that the executive or director may have caused through negligent acts in the performance of their duties and for management errors that, even if not committed by them, fall under their legal responsibility.
• Liability for labour practices: this refers to compensation paid to employees for improper (but not illegal or criminal) actions against workers.
• Reimbursement of amounts: payment of losses incurred by the director as a result of a claim by shareholders against the director or manager.

However, this would be equivalent to a fairly basic D&O policy. This type of civil liability insurance can also cover all of the following aspects in exchange for a higher annual premium:

• Legal defence: i.e. the costs of solicitors, barristers and even the legal costs of the proceedings.
• Fines and administrative penalties: provided they are insurable under the law.
• Rehabilitation of personal image: regardless of whether the claim against the director or manager is successful or not, the image of the company and these professionals may be tarnished. This is especially true if the case comes to light. These civil liability policies can cover certain advertising expenses aimed at restoring the public image of those affected.

As if that were not enough, directors and managers can also include investigation costs associated with the claims they receive and the posting of civil and, in some cases, criminal bonds.

What does a D&O policy not cover?

It is important to bear in mind that this type of civil liability insurance provides executives and directors with peace of mind in the performance of their duties, but not impunity. In fact, any claim relating to an illegal or unlawful act (e.g. embezzling company funds for personal gain or for the benefit of an acquaintance, or sexually or workplace harassing an employee) will not be covered by the policy under any circumstances.

Furthermore, this insurance does not cover claims made for events that occurred prior to taking out the policy, nor does it cover non-payment of taxes or other tax obligations or social benefits agreed with employees (e.g., pension or savings plans).

Essential insurance

Holding a management or administrative position in a company comes with a great deal of responsibility. In addition, in many cases, it is necessary to make risky decisions. For this reason, taking out civil liability insurance for this type of professional is essential, as it provides protection, peace of mind and confidence for all parties.

Likewise, civil liability insurance for executives and directors can prevent conflicts of interest between policyholders and shareholders. It is not surprising that many boards of directors require this insurance to be taken out when someone takes up a position.