What is a Directors’ and officers’ liability insurance

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This type of cover is currently popular nowadays, which reflects the growing trend towards action being taken against individual directors (or officers) of a company.

At common law, a director’s primary responsibility is to the company and not ‘the shareholders’ of the company. However, the Companies Act 2015 codified certain responsibilities of directors. They are required the directors to act honestly and in good faith, and carry out their duties with reasonable care and skill. The companies act imposes upon directors and officers responsibilities not only to their company, but also its shareholders, its employees, its creditors and to the public.

There is now a statutory list of duties for directors:

  • To act within powers of the company’s constitution and properly exercising those powers
  • To promote the success of the company for the benefit of its members as a whole. This includes, for example, taking account of the likely long-term consequences of any decision and the need for the company to maintain a good reputation for business conduct. The interests of the company’s employees must also be taken into account, as must the impact of the company’s operations on the community and the environment
  • To exercise independent judgment
  • To exercise reasonable care, skill and diligence
  • To avoid conflicts of interest – directors must authorize any individual director’s conflict of interests and may do so, provided there is no conflict with the constitution of the company
  • Not to accept benefits from third parties, unless these are unlikely to give rise to a conflict of interest
  • To declare an interest in any proposed transaction with the company

Directors and officers of a company can be prosecuted for failures and civil action can also be taken against them. Their liability is unlimited in amount.

Legislation allows companies to assist their directors financially while litigation or other proceedings are going on and to indemnify their directors against certain liabilities to third parties, even if the directors are at fault. However, they may not reimburse the legal costs of the unsuccessful defense of criminal proceedings or criminal fines and penalties.

Directors’ liabilities can arise at common law from:

  • Negligent advice or misstatement, particularly in the context of a merger or take-over
  • Acts outside the company’s constitution, such as excessive borrowing or unauthorized payments
  • Failure to disclose conflicting interests or the full extent of the director’s interests
  • Errors of judgment, such as failing to recognize insolvency
  • Negligent supervision, for example of delegated responsibility
  • Imprudent investments.

In addition, there is an ever-growing volume of legislation which directors must ensure their company complies with concerning insolvency, Taxation, data protection, the environment and competition.

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