All company directors have a set of legal responsibilities. If they fail to meet their obligations, they can potentially be sued, disqualified from being a director, and even be subject to criminal prosecution.
Obtaining an insurance policy can provide a level of protection and the ability to mount a defence, should claims be lodged in relation to an alleged ‘wrongful act’.
What are the responsibilities of company directors and what is a wrongful act?
As well as duties owed to Companies House in terms of annual filings etc, there are also a series of general duties which are set out by chapter 2 of the Companies Act 2006, which include:
- Duty to act within powers
- Duty to promote the success of the company
- Duty to exercise independent judgment
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflicts of interest
- Duty not to accept benefits from third parties
- Duty to declare interest in a proposed transaction or arrangement
Breaching any of these duties will comprise a wrongful act. Additionally, the following may be considered to be wrongful acts:
- breach of trust
- error or neglect
- misleading statements
- wrongful trading
Alleged wrongful acts can potentially lead to civil or even criminal prosecution.
What is directors’ insurance?
Directors’ and Officers’ Liability Insurance (otherwise known as D&O insurance) is generally designed to cover the cost of any claims made against directors and other company officers (i.e. company secretaries) in respect of alleged wrongful acts.
Civil compensation claims against directors may be lodged by shareholders, investors, employees, suppliers or other third parties. Regulatory or criminal action may be taken for certain alleged behaviours, such as fraudulent trading.
D&O insurance covers the cost of defending any legal proceedings, as well as any compensation costs which may arise (unless these relate to fraudulent, dishonest or criminal conduct which has been proven).
Please note: All insurance policies will vary – terms and conditions should be checked carefully.
What is normally covered by directors’ insurance?
D&O insurance generally covers current, future and past directors and officers of a company. Although it will depend on the specific policy, the types of claims which will normally be covered include:
- Claims from regulators, shareholders or investors that a director has failed to act in the company’s best interest
- Claims made by employees personally against a director (e.g. that they failed in their duty in relation to employment practices)*
- Liability for company debts in the case of insolvency etc.
- Disqualification and regulatory proceedings
- Other directors’ liabilities arising from claims of negligence, breach of duty etc.
* Please note: Companies can also normally purchase Employment Practices Liability Insurance to cover claims made against the company, as opposed to an individual director (this is different to Employer’s Liability Insurance).
What is not covered by directors’ insurance?
It is important to note that Directors’ and Officers’ Liability Insurance only covers claims made personally against specific company directors, for acts or omissions in their role as company directors. It does not cover claims made against the company as a whole.
D&O policies also exclude fraudulent, dishonest or criminal conduct (although they will defend such claims which have not yet been proven).