What is Director and Officer Liability Insurance?
D&O insurance policies offer liability cover for company managers to protect them from claims which may arise from
the decisions and actions taken within the scope of their regular duties. D&O cover was first conceived in the late 19th
century, and after a long period of obscurity has spread rapidly throughout the industrialized world since the 1980s.
Such policies cover the personal liability of company directors and officers as individuals (Side A cover), but also the
reimbursement of the insured company in case it has paid the claim of a third party on behalf of its managers in order to
protect them (Side B or Company Reimbursement Cover). Listed stock companies can also obtain cover for claims against the company itself for a wrongful act in connection with the trading of its securities (Side C or Securities Entity Cover).
Why Purchase Director and Officer Liability?
managers can make mistakes – and are often personally legally liable for them. They constantly walk a fine
line, making tough and complex decisions with huge impacts on the basis of the sometimes limited information available, for example in merger and acquisition situations. More and more companies are operating in a multinational
environment. Their investors, trading partners or operations are located in jurisdictions all over the world. This means that
directors and officers have to keep in mind not only their markets but also compliance regulations, different
government bodies, auditors’ opinions and the latest best practices for corporate governance and risk management in
numerous locations. This increased complexity in the operating environment puts managers in the firing line.
Coverage
The core purpose of a D&O policy is to provide financial protection for managers against the consequences of actual or
alleged “wrongful acts” when acting in the scope of their managerial duties. The D&O policy will pay for defense costs
and financial losses. In addition, extensions to many D&O policies also cover costs for managers generated by
administrative and criminal proceedings or in the course of investigations by regulators or criminal prosecutors. These
coverage extensions are gaining more and more importance among company directors. In ths way, managers receive
comprehensive, integrated cover that ensures them a reliable, consistent and structured legal defense.
There are different risks in different markets. The United States is by far the world’s largest D&O market with a premium
volume of around $ 6 billion, and there the most frequent source of claims are claims related to employment or HR
issues such as discrimination, sexual harassment or wrongful termination. From 2000 to 2008, over 40% of D&O claims in the US were employment related claims. In most cases the managers did not act themselves; they simply did not enforce employee conduct rules against discrimination and harassment. While these are the most frequent claims in the US market, they are not the most expensive ones. The severity of securities claims is much higher. Insurers are watching closely whether shareholder activism and class-action lawsuits are on the rise, but the frequency of these claims seems to have stabilized at its current high level. In other markets worldwide, shareholder claims are on the rise along with the general trend of increasing shareholder rights.\
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