There’s no doubt that the process of managing a company involves many duties and responsibilities. The globalization of the world economy has made things much more complicated for many directors and officers. They now have to make tough and complex decisions based on the information they have about the markets of the countries their company operates in, compliance regulations, auditors’ opinions, and the latest and most popular practices for corporate governance in a number of different business worlds. This explains why even experienced managers can make mistakes and be held personally liable for potential compensation, fines, and legal costs. If an action is brought against a director or officer, their personal assets may become endangered.
It’s interesting to know that a survey conducted by the Australian Institute of Company Directors found out that more than 73% of the respondents believed that the risk of being held legally responsible for actions and decisions made in good faith is medium to high.
In order to protect their managers from financial losses resulting from lawsuits, more and more companies nowadays purchase directors and officers insurance. A directors and officers insurance policy typically provides cover for twelve months on a ‘claims made and notified’ basis (this means that the insurer needs to be notified of the claim during the policy period). This type of insurance may cover executive directors, non-executive directors, executive officers, and other employees who are involved in the management of an organization.
A corporate directors and officers insurance policy provides financial protection for directors and officers against: claims by dissatisfied customers; claims by investors and shareholders who suspect dishonesty and mismanagement; claims by shareholders blaming you for misrepresentations in financial reports and statements; claims by regulatory authorities such as ASIC for breaches of the Corporations Act; claims related to employment practices and human resources issues, such as discrimination, sexual harassment, and unfair dismissal; claims for inaccurate or inadequate disclosure; claims for misrepresentation in a prospectus; pollution and other regulatory claims made by government bodies; claims by the ATO for tax owed by your company, etc.
However, a directors and officers liability insurance policy doesn’t cover fraud, criminal or intentional non-compliant acts, illegal remuneration or personal profit, property damage and bodily harm, claims made under a previous D&O policy, and claims covered by other insurance policy.
Keep in mind that many potential directors and officers will refuse to become a part of your company without D&O insurance. Taking out D&O liability insurance will help you attract and retain strong leaders.