What Is Directors’ Insurance?

Directors’ insurance is liability coverage for a company’s board of directors. It is a form of D&O insurance, which extends to cover both directors and officers. 

Directors’ insurance intends to protect directors and their companies from financial losses and legal fees if they get sued for alleged wrongful acts. These could range from mismanagement and negligence to breach of fiduciary duties and violation of workplace laws.

Who might need directors’ insurance?

Although directors’ insurance is not legally required, it is strongly advised for anyone sitting on a board of directors. Whether they are executive, non-executive or independent directors, if they get sued by another party, their personal assets are put at risk.

Due to the complex decision-making environment and potential impact on stakeholders, directors’ insurance is critical in big commercial entities and complex community organisations, such as hospitals.

Why do directors need insurance?

Serving as a director comes with a high degree of responsibility. One must make strategic decisions that can significantly impact the company and its shareholders. If the results are unfavourable, the director may face a lawsuit and be personally named. Directors’ insurance offers legal protection in such cases, covering the defence and other legal fees.

Providing directors’ insurance improves board recruitment and retention. Qualified directors may hesitate to join a board that does not protect their personal assets.

Types of directors’ insurance

There are three types of directors’ insurance, including:

Side A coverage

This type of coverage extends to individual directors when a claim is made against them. The payment is made on behalf of the individual when their company cannot indemnify them. In this case, the director’s personal assets are put at risk.

Side B coverage

This coverage repays the organisation for indemnifying a director, including all legal and settlement fees. In this case, the company assets are on the hook.

Side C coverage

Side C coverage extends to the company for claims typically concerned with securities litigation. It helps the company maintain financial stability by covering defence and settlement costs.

Factors affecting directors’ insurance

The following factors can impact directors’ insurance policies:

• Company size: The bigger the company, the greater its financial exposure. Thus, premiums tend to cost more.
• Industry: The extent of risk exposure ties to a company’s nature of work. High-risk industries can be subject to higher premiums due to greater legal action potential.
• Claims history: This refers to a company’s history of legal claims against directors. A high number of claims reflects higher premiums and more restrictive terms.
• Risk management practices: Strong policies to mitigate and manage risks can lead to more favourable and flexible insurance terms.
• Legal and regulatory environment: Companies operating in areas with high litigation probability may face higher premiums.