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Avoiding legal landmines with Directors’ & Officers’ cover
Lawsuits against big corporations tend to capture the spotlight, but executives at smaller businesses shouldn’t be complacent about the potential legal landmines they may face.
In such a litigious environment, and with regulators focusing more and more on corporate culture, there are many areas where directors and managers may find themselves exposed if they haven’t taken steps to lock in protection.
Research says directors’ and officers’ insurance policies are often overlooked at the smaller end of the market, particularly among micro-enterprises.
Many SME (Small and Medium-sized Enterprises) decision-makers often lack knowledge about where and how easily management liability might arise and also about the nature of the Directors & Officers’ Liability (also known as D&O) product and what it covers.
Nowadays, SMEs can easily become the target of legal actions, with customers, suppliers and employees just as aware of their rights whether the business is large or small. Australian regulators are also increasingly active across the financial services spectrum.
Often, company directors and managers believe their individual risks are being covered by other parts of the business’s insurance package, however, that is all too often not the case.
Professional indemnity VS Management liability
Professional indemnity insurance, for example, covers activities of a business, whereas management liability policies, which include directors’ and officers’ cover, provide protection where third parties claim for losses due to mismanagement.
The directors and managers of an SME can individually face claims for actions alleging fraud or other breaches, engaging in unfair competition, defamation and accusations of other illegal conduct, however, a typical D&O policy will cover these representation costs, such as when a person must attend an inquiry, legal expenses in defending a claim and compensation paid to resolve an issue.
SMEs often put a strong focus on making sure insurance policies are in place for property, fire and business interruption, however, directors’ and officers’ cover is also a vital area to address.
If you’re a manager or director of a company, review your options with your risk adviser today.