Guardrisk Tailored Risk Solutions
In an increasingly litigious society, and with growing emphasis on personal accountability of company directors, it comes as no surprise that companies are buying more director and officers (D&O) insurance than ever before.
According to a recent report issued by global rating agency, Fitch Ratings, “a compilation of industry statutory data from D&O supplemental filings shows incredible 40% direct written premium growth in 2020 to a record $10.7 billion. This expansion follows 20% premium expansion for 2019”.
But, despite the growth in demand for D&O cover, unfortunately, as is often the case with all types of insurance, many D&O policyholders don’t fully understand – or interrogate – their cover until they need to claim.
Organisations routinely provide D&O liability insurance for directors and officers, who can be held personally liable for company losses. But this type of insurance is not a catch all cover and it is important that directors understand exactly what is and what is not covered. It’s a complex insurance offering, requiring specialist skills to both underwrite and sell correctly. That’s according to Walter Cronje, Executive Head, Conventional Risk at Guardrisk.
Basically, D&O insurance covers the legal liability of directors and officers for damages arising from a “wrongful act”. In this context, a wrongful act is a breach of duty or trust, or an error, misstatement or misleading statement, or employment related act. Generally, the cover also provides for legal expenses in the defence of an allegation of a wrongful act, and in the event of civil, regulatory, statutory or administrative proceedings.
“There is a common misunderstanding that D&O policies would automatically be paying out huge amounts in claims in event of institutional failure, but that is not necessarily the case. Sometimes things go wrong in business and a D&O policy would not automatically pay aggrieved third parties when a company fails. In such instance, the onus would be on the third party to prove that a wrongful act on the part of a director or officer led to its loss,” says Hendré Horne, Executive Head, Specialist Liability at Guardrisk.
D&O insurance does not cover acts of fraud or dishonesty committed by an insured person, in fact, such acts are specifically excluded in all such policies. While the policy would pay the legal defence costs of a director or officer to defend such allegations, those costs would have to be reimbursed if it is found that the individual acted fraudulently or dishonestly.
In addition to what is covered it is important to note who is covered by D&O insurance. Typically, it is the directors and officers, not the company itself, that are covered. While individual policies would have their own specific wordings, D&O insurance generally covers board members, the company secretary, board committee members and employees acting in managerial and supervisory
“From the company’s point of view, it is important to know that the policy belongs to the directors and officers, not the company (other than in instances where securities cover is purchased by a company). Thus, a company cannot lodge a claim under ‘its’ D&O policy because it suffered a loss due to the wrongful acts of one of its directors or officers. The cover is there to defend the individual directors and officers against an allegation of a wrongful act and aggrieved parties don’t have access to claiming directly against these policies,” says Horne.
While D&O insurance is not compulsory in terms of company legislation, it is an important arrow in the quiver of prudent corporate risk management and it certainly serves to provide an element of comfort to the directors and officers of a company.