Why buy Directors and Officers insurance?
Breach of Duty or Criminal Offence
The Companies Act will not allow a company to use its resources to defend a director for a breach of duty or a criminal offence. What it does allow is for the company to purchase Directors and Officers Insurance.
Indemnifying Directors
In those instances when the company can legally pay for the defence of its directors how many SME companies are resourced to do this? The company itself could founder if the litigation costs were high.
Protects Personal and Company Assetts
Without a Directors and Officers Insurance policy it is either personal assets or company assets that are on the financial line. Neither choice is a happy one.
The Best Defence
No matter how diligent we are mistakes can and will happen. Many or even most of these will go unnoticed or will not result in any significant consequence, however sometimes luck runs out. For this reason directors will vigorously want to defend themselves and be in a position to afford the best defence. A D&O policy provides the resources to do this, allowing the directors the opportunity to clear their name or at the very least prove that what occurred was unforeseen and not a deliberate act of negligence.
Wrongful Trading
Honesty is not a defence when it comes to wrongful trading. The Insolvency
Act creates strict liability.
This gives directors a huge dilemma as most have real passion for their business
and will not give them up without a fight. Provided they believe they can
succeed most will feel compelled to try and turn the business around. This
is not only for their own benefit but also for the staff and families their
business support because the majority of SME business owners and directors
have a real sense of responsibility to their employees. By deciding to fight
on, the directors face significant consequences beyond the loss of their company
and assume personal liability if they are not successful.
The Enterprise Act
What you consider to be a tough business stance could in fact be a breach of the new Enterprise Act. This prohibits restrictive agreements and abuse of a dominant position in the market. Penalties against Directors can include up to 5 years in jail and unlimited fines.
Controlling Mind
There is much talk about new legislation on corporate killing. If it is introduced it will affect every business with its implications. Current legislation has already proven adequate in convicting directors of SME companies. Until now it is only the Directors of small companies that have been successfully prosecuted and jailed for these crimes because the prosecution was able to prove they were the “Controlling mind” of the company and therefore directly responsible for the accidents that occurred.
Officers
Specific issues within a company can involve a number of people at different levels. Employees who are not directors can be in positions of responsibility and they can also be held accountable.
Entrepreneurial Risk
As directors of a company we are often faced with choices. There are no certainties and we exercise our best judgement. When these succeed there is a real sense of achievement and we value this entrepreneurial spirit. Every now and again it does not work out and entrepreneurialism is replaced with accountability. As an example the DOT.COMM bubble generated many D&O claims for insurers as investors sought to recover their investments. Directors and Officers Insurance gives entrepreneurs a safety blanket allowing them to take sensible risks.
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