Directors and Officers Insurance - An overview
What is Directors and Officers Insurance
Directors and Officers Insurance is an insurance product designed to reduce the risks that directors face when serving on a board of an organisation.
Serving as a director may be in either a paid or unpaid position. Both paid and unpaid positions may still expose a director to the risks involved when engaging their services.
Why Directors and Officers need D&O Insurance
Serving as a director can be a great opportunity. However, being a director brings with it a greater level of scrutiny and responsibilities. Operating as a director brings with it a number of duties and obligations that you are required to adhere to.
Some Directors and Officers Obligations include:
- Avoid conflicts of interest (common law requirement)
- Act in the best interest of the corporation
- Act in good faith
- Prevent insolvent trading
- Exercise care and diligence
Directors and Officers are responsible for the actions that they undertake during their role as directors with the organisation. Directors may be liable if they breach a duty or fail to meet an obligation that is required as part of their role as a director.
If directors fail to meet an obligation or beach their duty, then they may be liable for and required to pay:
- Compensation to an aggrieved party
- A fine or penalty (imposed by a regulatory authority or court)
- Legal costs; both for yourself and other parties.
What about any gaps in the Directors and Officers Insurance?
Whilst directors and officers insurance can provide coverage for most financial exposure and risks that a director may face. There are some additional risks or exposure that D&O Insurance may not be able to cover. Some of these include:
- Reputational damage or loss of reputation
- Individual financial loss or future loss of income due to your liability
- Criminal offences and fines and penalties.
- Criminal conduct including Fraud and intentional misconduct
What should potential Directors do when considering joining a board of directors?
Given the potential for gaps, it is important for individuals considering potential directorships to due appropriate due diligence to review the organisation in-depth and to understand the types and risks that any potential directorship may expose you to.
Spend time getting to know the organisation. Review the most recent financial statements. Chat with key staff members and stakeholders. Make sure you review the directors and officers insurance that they currently hold.
How an Insurance Broker can assist.
Whether starting out as a director or officer or looking to review your current scenario and board exposure. An insurance broker can help guide you through your current risk profile and to help to create risk mitigation strategies with you.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Channelle Ricketts.