Directors and Officers Insurance UK: What D&O Cover Protects Against

What Is Directors and Officers Insurance

Directors and officers (D&O) insurance protects the personal assets of company directors, officers and senior managers against claims arising from their management decisions. Under the Companies Act 2006, directors owe duties to the company including the duty to act in good faith, to exercise reasonable care and skill, and to avoid conflicts of interest. Breach of these duties can result in personal liability.

What D&O Insurance Covers

D&O insurance typically covers claims brought by shareholders alleging mismanagement or breach of duty, regulatory investigations by the FCA or HMRC, wrongful trading claims in insolvency scenarios, employment practices liability claims by employees for discrimination or unfair dismissal, and disqualification proceedings under the Company Directors Disqualification Act 1986.

D&O policies are typically structured in three sections. Side A covers the directors personally where the company cannot indemnify them -- typically in insolvency. Side B reimburses the company where it has indemnified the directors. Side C covers the company itself for securities claims.

Who Needs D&O Insurance

D&O insurance is relevant for any company with a board of directors, including private limited companies, public companies, and not-for-profit organisations with directors or trustees. It is particularly important for companies with external shareholders, regulated activities, or significant employee headcount.

Startups and scale-ups seeking venture capital or private equity investment are often required to purchase D&O insurance as a condition of investment. Investors want assurance that directors will not be deterred from necessary decisions by personal liability risk.

D&O Insurance and Insolvency

Insolvency is one of the most significant D&O risk scenarios. When a company becomes insolvent, directors can face claims for wrongful trading under the Insolvency Act 1986 if they continued to trade when they knew there was no reasonable prospect of avoiding insolvent liquidation. D&O insurance typically covers wrongful trading defence costs.

How Much Does D&O Insurance Cost

Premiums depend on the company's size, sector, financial position, claims history, and the limit of indemnity required. Small private companies may pay from £500 to £2,000 per year for a £1 million limit. Larger companies or regulated entities pay significantly more.

Frequently Asked Questions

Is D&O insurance a legal requirement in the UK?

D&O insurance is not legally required. However, it may be required contractually by investors or lenders. Given the personal liability exposure of directors under the Companies Act 2006 and Insolvency Act 1986, it is widely considered essential for any director of a company with external stakeholders.

Does D&O insurance cover criminal acts?

No. D&O insurance excludes deliberate criminal acts, fraud and dishonesty. It covers unintentional errors and decisions made in good faith that are subsequently found to be wrong. Where a director is accused of wrongdoing, the policy typically covers defence costs until a final determination.

Can a company pay for its directors D&O insurance?

Yes. Under the Companies Act 2006, a company may purchase D&O insurance for its directors without requiring shareholder approval, provided the articles of association permit it. The premium is an allowable business expense.

What is the difference between D&O and professional indemnity insurance?

Professional indemnity covers claims arising from professional advice or services provided to clients. D&O covers claims against directors and officers for management decisions and governance responsibilities. A company may need both.