Directors and Officers may be held personally liable to any parties that have an interest in the running affairs of a company, be that a PLC or a Limited company. Most directors of a company should be aware of directors and officers duties, which are wide ranging and sometimes complex. This aspect alone means there is a great need for a company to obtain Directors and Officers Insurance (although it should be emphasised that Directors and Officers Insurance (D and O) does not provide cover against every breach of a director or officer’s duties).
1. Where directors owe duties as an agent of the company
They must not act outside their powers, must carry out their duties with reasonable skill and must act in good faith in the company’s interests.
2. Where directors owe duties as fiduciaries of the company
They must not abuse their position of power over the company for their own interests. For example, they must not deal with the company on their own behalf without declaring their personal interests.
3. Where directors are subject to duties imposed by statute
There are numerous statutory duties of widely differing types. Among the many Acts which impose duties on directors are the Companies Acts 1985 and 1989 and, of course, the new Companies Act 2006, the Insolvency Act 1986, the Financial Services Act 1986, the Data Protection Act 1974 and the Health and Safety at Work Act 1974. There are other Acts and also certain European legislation. Even the most conscientious director will find it hard to keep up.
4. Where directors owe duties on the insolvency of a company
Directors must in certain circumstances consider the interests of creditors of the company. Such duties were first imposed in 1986 and represent a revolution in the legal position of a director.
If a company incurs debts when the directors knew or ought to have concluded that the company would fail, the directors may, if the company subsequently goes into insolvent liquidation, incur personal liability for those debts. This is ‘wrongful trading’ under the Insolvency Act 1986 (section 214). If found liable for wrongful trading, they may have to pay the company’s creditors in full from their own resources; their liability is potentially unlimited.
5. Where directors of public companies owe specialised duties
Directors of public companies are subject to extra duties, for example a duty to ensure that all listings particulars are true and are not misleading
Directors and Officers Liability Insurance (often called D&O) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization.
Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. It has become closely associated with broader management liability insurance, which covers liabilities of the corporation as well as the personal liabilities for the directors and officers of the corporation.
At its roots, D&O insurance insures “behavior” in that the decisions of directors and officers are the matters which often lead to covered claims. That is, an incorrect decision often leads to shareholder discontent and, thus, a lawsuit against the directors and officers who made the decision.
State law typically protects the directors and officers from liability (particularly exculpatory provisions under state law relating to directors) but this does not mean that actions are not brought by private plaintiffs (aggravated by the loss of money and seeking a quick payout from insurance proceeds). As such, even innocent errors in judgment by executives will bring D&O insurance into the forefront of the matter; espcially because most “D&O” claims are settled