Directors’ and Officers’ insurance

D&O - what you need to know

Directors’ and Officers’ insurance (D&O) is a form of professional indemnity insurance tailored for the needs of people in management roles at companies, clubs, foundations and non-profit organisations. It is particularly prevalent in heavily regulated sectors, for example financial services companies, where regulation changes frequently and the financial impact of claims is often high.

If a member of management is sued for breach of duty, the insurance steps in to cover legal and court costs. Where claims are justified, the policy pays for the financial settlement, with the insurance company guaranteeing compensation up to the pre-agreed policy limit.

Higher-profile claims and stricter regulations have led to an increasingly litigious mentality amongst companies pursuing claims for damages against their own managers for breaches of duty. It is not unusual for claims to amount to millions of euros – D&O policy limits are designed to reflect this.

While known throughout the insurance world as Directors’ and Officers’ insurance (which favours the American phrasing) German-written policies do include the executive and supervisory boards we see in the German legal system.

What does Directors’ and Officers’ insurance cover?

Every company director or member of a supervisory board can be held liable by their company for the decisions they make – and especially breaches of duty committed during the course of your business activities.

Typically, claims relate to inaccurate or misleading disclosures, reporting errors, employment malpractice, breaches of regulation and insolvencies.

It is often the companies themselves that assert claims on their own management – but other common claimants include clients, shareholders, investors, contractual partners, competitors or regulatory bodies.

In addition, claims can hold several directors jointly and severally liable – in this way, all directors can be held responsible for the mistakes of one.

In the case of proven breaches, you can be held liable and need to compensate your company or aggrieved third parties with your own personal wealth and assets, with no upper liability limit.

D&O insurance would step in to finance your legal defence in court, and pay any required compensation on your behalf, up to the value of the pre-agreed policy limit.    

When purchased by the company, D&O coverage ‘flows down.’ This means that when an organisation buys D&O, all of their past, present and future managers are covered for actions they take in the course of managing the business and their sub-ordinates.

For example, a company could claim on D&O when there has been claim by a subordinate concerning their manager, but not by a manager could not make a claim on their subordinate, as the coverage only covers management activities.

Criminal activities are not covered – but they are covered up until such time the accused is found guilty. Insurers would look to finance a defence, but at the point of a guilty verdict, the insurer would expect reimbursement of legal fees and other costs incurred.

Fines are covered in situations where it is legal to use insurance to pay fines.

How does D&O insurance work? 

Directors’ and Officers’ insurance finances the legal and regulatory defence of claims made against members of their management apparatus.  

There are three types of D&O coverage:

Side A coverage is where named individual officers are insured. This is useful when a company refuses or is unable to pay for indemnification (perhaps in the event of insolvency). Without insurance, the officer’s personal wealth would be at stake, in the event of a claim against them.

Side B coverage protects the company. The company steps in to pay the costs of the defence and the insurer reimburses them.

Side C coverage is also called “entity coverage” and provides coverage for the company itself, as the company’s own reputation may need defending in the event of claims against its managers.

The exact structure of each company’s D&O will be tailored their specific needs and risks.

What type of D&O insurance should I buy?

It is necessary to make a decision about whether the policy covers only managers (side A) or the company as a whole (side B and side C).

Your broker will be able to talk you through your options, and the benefits of each. It is often wise to choice a policy with as few exclusions as possible.

Common exclusions include:

Professional services exclusion (moving the risk to the Professional Indemnity cover, which is often more expensive)

Bodily injury and property exclusion (effectively moving risks such as corporate manslaughter to the company balance sheet)

Environmental exclusions

Howden hendricks policies offer fewer exclusions than many other policies available in the market. Please contact us to discuss your options with an experienced consultant.

Howden hendricks is the market leader for D&O in Germany

As the legal and business environment has evolved, so have our solutions. Our policies have evolved throughout the years to keep pace with changes, and improve coverage.

At the same time, we are committed to never reducing coverage, so that any future claims are backed by the same quality of protection.