Why Directors and Officers Liability Insurance Isn’t Just a Big-Business Issue
It probably didn’t feel like a particularly momentous decision at the time.
The business was growing. Another employee was needed, new equipment would improve productivity, and signing a larger lease seemed like the logical next step.
So the directors discussed it, agreed and got on with running the business.
After all, that’s what directors do every day – make decisions based on the information available to them and what they believe is best for the business.
But who knew that this particular decision was going to go wrong?
Suddenly, what seemed like an ordinary business decision has become something considerably more serious. Questions are being asked about how the decision was made, who approved it and whether the directors fulfilled their responsibilities.
And that’s where Directors and Officers Liability Insurance can become an important consideration.
Most business decisions never result in allegations or legal action. But when they do, the consequences may not necessarily stop with the company itself.
Sometimes, the people who made the decision can find themselves in the firing line too.
Being a Director Is More Than a Title
It’s easy to associate the word “director” with large corporations, boardrooms and executives in expensive suits.
In reality, directors are found throughout Australia’s small business community.
Your builder could be a company director. So could your electrician, accountant, local manufacturer, retailer or IT provider.
And if you run your own business through a company, you may be one yourself.
A company is a separate legal entity, but that doesn’t mean its directors are automatically protected personally from everything that happens within the business.
The Australian Securities and Investments Commission (ASIC) makes it clear that directors have legal responsibilities. Among other things, they are expected to act with care and diligence, act in the company’s best interests, understand its financial position and ensure the company meets its legal obligations.
In some circumstances, directors can face personal legal and financial consequences if those obligations aren’t met.
When a Decision Becomes an Allegation
Imagine our growing business has taken on those additional employees, invested in equipment and moved into larger premises.
Then something goes wrong.
Perhaps a shareholder, employee, creditor, regulator or another affected party alleges that one or more directors failed in their duties when making or overseeing a decision.
The allegation may ultimately prove justified – or it may not.
Either way, responding can involve investigations, legal advice and significant defence costs.
That’s where Directors and Officers Liability Insurance – often available as part of broader Management Liability cover for small and medium businesses – may become relevant.
What Can Directors and Officers Liability Insurance Cover?
Depending on the policy, Directors and Officers Liability Insurance may provide cover for legal defence costs, certain settlements or compensation, and costs associated with some investigations or inquiries arising from allegations against directors and officers.
D&O cover is generally designed to respond to certain claims arising from alleged wrongful acts committed by directors and officers while carrying out their management responsibilities.
However, D&O insurance isn’t a licence to make reckless decisions.
Policies contain limits, conditions and exclusions. Matters such as deliberate fraud, illegal personal gains and circumstances already known before the policy commenced may not be covered. Some fines and penalties also cannot legally be insured.
Exactly what is and isn’t covered will depend on the individual policy and circumstances.
Who Needs Directors and Officers Liability Insurance?
There isn’t a one-size-fits-all answer.
When we hear “Directors and Officers Liability Insurance”, it’s easy to picture the board of a multinational corporation rather than the directors of a small business.
But the responsibilities attached to being a director don’t disappear simply because the company is small.
In many small businesses, the distinction between business owner, manager and company director can become blurred because the same person wears all three hats.
That person may spend Monday negotiating with suppliers, Tuesday dealing with employees, Wednesday talking to the bank and Thursday signing a major contract.
They’re everyday business activities – but they’re also decisions being made on behalf of a company.
Whether D&O cover is appropriate will depend on the individual business, its structure and activities, and the exposures faced by its directors and officers.
What’s the Difference Between D&O and Management Liability Insurance?
D&O Insurance focuses on certain exposures faced by directors and officers, while Management Liability Insurance can provide broader protection covering a range of management-related exposures, depending on the policy.
For many small and medium-sized businesses, therefore, the conversation may be broader than standalone D&O cover.
Which approach is appropriate depends on factors including the size and structure of the business, what it does and the risks faced by the people running it.
That’s one of the reasons it can be worth discussing the issue with an insurance broker rather than simply choosing a policy based on its name.
Protecting the People Behind the Decisions
Most company directors don’t begin their working day wondering whether today’s decisions could eventually result in a claim against them.
They’re concentrating on customers, employees, cash flow, suppliers and getting the job done.
But occasionally a decision – or an allegation about how a decision was made – can have consequences not only for the company but also for the people responsible for running it.
If you’re a director of a Tasmanian business, it may be worth asking whether your current insurance arrangements take that potential exposure into account.
RSM Tasmania Insurance Brokers can help you review your existing business insurance and discuss whether Directors and Officers Liability Insurance or Management Liability cover may be appropriate for your circumstances.
Because sometimes protecting the business also means thinking about the people making the decisions.
Frequently Asked Questions About Directors and Officers Liability Insurance
What does Directors and Officers Liability Insurance cover?
Depending on the policy, D&O Insurance may cover legal defence costs, certain settlements or compensation, and costs associated with some investigations or inquiries arising from allegations against directors and officers. The exact protection depends on the policy wording, limits, exclusions and circumstances of the claim.
Can directors of Tasmanian small businesses be personally liable?
Yes, in some circumstances. Operating through a company does not remove every potential personal liability of its directors. Australian company directors have legal duties, and personal liability can arise in particular circumstances.
Does D&O Insurance cover legal defence costs in Hobart?
It can. For Hobart businesses, as elsewhere in Australia, whether legal defence costs are covered depends on the D&O policy and the circumstances of the claim. Eligible defence costs associated with certain claims or investigations may be covered.
Is Directors and Officers Liability Insurance only for large companies?
No. Directors of small companies have legal responsibilities too. Whether D&O Insurance is appropriate depends on the company’s structure and activities and the potential exposures faced by its directors and officers.
Where can I get Directors and Officers Liability Insurance in Tasmania?
RSM Tasmania Insurance Brokers can discuss your business structure, existing insurance arrangements and potential management exposures and help determine whether D&O or broader Management Liability cover may be appropriate.
Remember, this article is general in nature and doesn’t take into account your specific objectives, financial situation, or needs. For advice tailored to your circumstances, have a chat with us at RSM Tasmania Insurance Brokers Hobart.
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