Whether you’re starting a new business or reviewing the insurance arrangements of an existing one, you’ll need to think about protecting your firm against the cost of legal action in the event that something goes wrong.
But many firms struggle to identify exactly what protection they need – should you buy Directors and Officers’ insurance (D&O), or professional indemnity cover (PI), or both?
What is Directors and Officers’ insurance?
Directors and senior managers will usually have specific duties. If they are found to have to have acted outside their terms of reference, civil, criminal or regulatory actions may be brought against them. D&O will cover the cost of the legal defence, plus any compensation owed should the defence be unsuccessful.
Because these claims are generally about corporate mismanagement rather than service failure, they will usually be brought by shareholders, creditors, regulators or employees, not by customers.
There are two types of D&O cover: corporate protection covers all directors and senior employees across a company, while individual protection is more suited to directors of start-up businesses or those who wish to cover themselves against any potential claims made after they leave a company.
What is Professional Indemnity insurance?
If you provide a service or advice, no matter how confident you are in its quality, there is always a possibility that a client might bring a claim against you for harm caused. PI will cover the legal expenses involved in defending the claim, as well as the compensation due should the defence be unsuccessful.
D&O or PI – which type of insurance should you buy?
Whether you buy PI, D&O or both will ultimately depend on what your business does and how it is organised.
If your firm provides an advisory service, you should consider taking out PI. Note that some professions are required by their regulatory bodies to have PI, e.g. solicitors, accountants, architects and financial advisers. And some companies require firms to have PI cover before they’ll agree to do business with them.
If your company is publicly listed and run for the benefit of shareholders, you should consider buying D&O. But D&O isn’t only for these types of firms. Although privately owned businesses don’t have shareholders, there is still scope for its senior employees to be personally sued, for example, in an unfair dismissal suit.
Need more help?
Of course, it would be easy to say that you should buy both types of insurance to make sure you’re protected against every eventuality, but no one wants to buy more cover than they really need. So, if you’re still not sure which types of insurance to buy, speak to a specialist for advice.