We’ve all heard bizarre lawsuit stories, including the accounts of a woman who sued McDonald’s for serving her hot coffee (which subsequently burned her), the man who sued himself for acting against his own religious beliefs, or the customer who took an energy drink brand to court over his persistent tiredness.

In a time when it’s possible for just about anyone to sue anyone, and for just about anything, organisations are urged to arm themselves with insurance policies that protect against legal claims made against their business, their employees, and their directors – whether legitimate or not. One such policy is the directors and officers (D&O) liability insurance.

What is D&O liability insurance?

D&O liability insurance is designed to protect individuals from personal losses if they are sued because of serving as directors or officers of a business or another type of organisation.

People might sue the management of an organisation in their personal capacity when the involved directors or senior officers are accused of mismanagement or for placing their personal interests ahead of that of the company, the customer or the general public. If these actions result in damages or losses, there may be grounds for a liability case against the directors or officers in a personal capacity.

The opportunity to sue is open to just about anyone: employees, customers, shareholder, vendors and even the organisation’s competitors. The legal suits that could arise against directors and officers may include:

• Falsification, distortion or exaggeration of company assets
• Financial losses or bankruptcy resulting from breach of duty
• Fraud
• Misappropriation of business funds
• Lack of corporate governance
• Non-compliance with workplace policies
• Theft of intellectual property
• Poaching of competitor’s customers

Illegal acts or illegal profits are generally not covered under D&O insurance.

The Benefits – how D&O liability protects and empowers your company

D&O liability insurance protects personal assets belonging to corporate directors and officers, as well as their spouses. A D&O liability policy usually covers legal fees, final settlements and other costs that may arise as a result of and during the lawsuit.

It is often mistakenly assumed that D&O claims occur in public companies and that only shareholders launch such lawsuits. The fact is that public, private and non-profit companies face equal risks when it comes to D&O litigation. Any company that has a board of directors or advisory committees should consider D&O insurance, including non-profit organisations.

An organisation doesn’t have to generate massive revenue for its directors and officers to end up being personally sued because of their role within the company – whether the alleged mismanagement was intentional or an honest oversight. Even smaller companies with fewer assets and shallower pockets need the protection of a D&O liability policy.

The benefits of a D&O liability insurance policy include:

1. Peace of mind: Directors and officers of an organisation may conduct business with the assurance that should they encounter a lawsuit against them in a personal capacity, pertaining to their role in the business, the company’s insurance will cover legal fees, settlements and other losses and damages. In fact, because it’s deemed a standard financial backing and indemnification provision, many officers and directors may insist that the organisation provide a D&O policy as part of their employment contract.
2. Minimise disruption to business: By ensuring that directors and officers are taken care of, in the event of a lawsuit against them in their personal capacity, a company may help their senior managers cope better, bounce back faster, and perform duties consistently.
3. Better standing in securing investment: Organisations that have plans to secure funding from investors will need to have D&O insurance in place as a matter of course. Investors are more likely to fund companies that have taken measures to mitigate their risks.
4. Attract and retain top management talent: Companies who hope to attract and retain top talent for directors have a better chance of doing so with D&O insurance in place, as more qualified senior management candidates will be reluctant to put their personal assets at risk.

For further information about D&O insurance or for a quotation, reach out to a qualified Indwe Risk Services advisor at (011) 912 7300 or indwe@indwe.co.za.