D&O. 4 reasons you need/or don need it
- Rayvern Chng
- Oct 24, 2021
- 3 min read
Director & Officer Liability insurance is an unfamiliar concept for many business owner, you may or may not hear of it before. It doesn't matter.
What we are going to discuss today is 4 reasons why it is important for your organisation and why it is not.
D&O is often mixed up with PI (Professional Indemnity) insurance as their scope of coverage is very similar, so before we get into the 4 reasons let me show you a quick summary of difference between the 2.
With that out of the way, let's look into the 4 reasons why you should or should not have the D&O, number 4 will shock you.
1st reason You have employees.
HR and employment practise is increasingly one of the biggest factor in a D&O insurance claim.
As employees are getting more awareness in their rights as employee, on what is permissible and what is not in the workplace, any wrongdoing is getting less tolerated. Some common employee claims include but not limited to: harassment, discrimination of employees, be it due to age, race or even gender can be grounds for lawsuit.
However you don't really need it if you are one-man show or have a very small team.
2nd reason You have shareholders
Shareholders may have many reason for investing in your company, however the main and major will be money, if for all and any reason that you caused the company to lose money, this is where the shareholders may hold a cause against you liable.
Loss may not be through business operations alone. other than losing money from operations, it also includes like fines from government.
On the other hand, if you don't have shareholders or you are the only owner, means you don't have anyone to be accountable for, then you don't need.
another reason is shifting your business online
Covid has speed up many company journey to digitalise their business. Data breaches is one the key concern for such trend.
Take for example the company fined for data breach in a cyber attack, the shareholders can also hold the director to account for not putting a better measures in place.
3rd Conflict of interest
Its getting more common that business owner now owns more than 1 business. More often that not it will be in the same industry. When you work in 2 company of the same industry at the same time how do you keep it separate? its difficult i say.
Claim example: A trusted manager has authority to select suppliers for the company. He channels a large proportion of projects to one particular supplier in return for regular cash payments of several hundred pounds each month.
4th Bankruptcy
Many company especially during covid went for financing, be it investors injecting capital or getting loan. It is understandable that company financial performance may be impacted due to covid. However it does not justify one's way of misrepresenting the company financials in order to secure investment or loan.
And don't think that all liabilities is discharged after a company is shut down just because it is a separate entity.
The actions of a Director is liable up to 7 years even after he steps down.
When this company went into liquidation, the liquidator revisited a number of transactions approved by the directors and decided they should not have taken place. The liquidator indicated an intention to sue the directors for a return of the money in question and also investigate potential disqualification proceedings. D&O paid to defend the directors (involving substantial legal and experts’ costs) and the claims were subsequently dropped.
At the end of the day, having a D&O in place do not absolve you from all the potential litigation but we believe litigation cost should not hinder one from proving one's innocence.
No matter how complex or less complex is your company, let us know how we can structure a effective risk management solution for you.
Contact us here.
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