Directors’ and Officers’ insurance is designed to protect the management from personal liability. Riikka Akselinmäki, the Head of the Department at Fennia, shares her knowledge on the insurance and why every board member should know about it.
The most important duties of a board is to provide strategic direction, oversight, and accountability for the company. However, sometimes unexpected situations cause significant damages both to the company and the people involved in the decision making. As the property damages, also the company officers and directors can be protected with insurance. There are different liability insurances, Directors’ and Officers’ Liability Insurance (D&O) being one of these.
What does Directors’ and Officers’ insurance (D&O) cover?
Directors’ and Officers’ insurance is designed to protect the company, board members, and the managing director from claims which may arise from the decisions and actions taken within the scope of their regular duties. It can also cover the supervisory board and their deputies, the chairman of the annual general meeting, and some other directors and officers.
“The D&O can help to protect the company in cases where the managing director or board members act negligently which causes damage to the company. The insurance covers the compensation that a board member would have to reimburse for the company in the case of a negligent decision. Additionally, it can cover the legal fees in case the board members are sued when there is no negligent act involved. Thus, it brings protection both to the company and the directors and officers”, tells Riikka Akselinmäki, the Head of Department at Fennia.
Something that the insurance does not cover are the gross negligent acts and the bad business decisions.
“Sometimes it can be that the shareholders sue the company based on a business decision that they believe was not done with care. In these situations, the insurance can cover the legal fees if there was no negligent act involved. A good example, why it’s always important to attend the meetings, document all the decisions made, and speak up if you do not support some decision.”
“If there’s only a negligent act on the board member’s part then in this case the insurance can help to cover the legal fees of the board member”, Akselinmäki points out.
The insurance covers pure financial loss, based on the decisions made after the first day of the policy period. If the insurance is taken after the negligent act has already occurred, it does not cover the damage.
Example case:
The Board of directors and managing directors have made business decisions with care, but later it turns out that some of the shareholders believe that the business deal was bad, and decide to sue the company. In this situation, the company can make a claim to the insurance company and the insurance company hires the lawyer who handles the case. An example of a situation, where the legal fees can be covered by the insurance. And in the best-case scenario, there is no compensation that needs to be paid to the shareholders.
Checklist for board member:
- Check that the company has the D&O insurance and the scope of it
It is always the company that acquires the directors’ and officers’ insurance. As a board member, it’s important to make sure that the company has this insurance and to check the scope of the insurance, such as what is the sum insured. The size of the sum insured differs based on aspects such as the size of the company, the home country of the company, and the insurance company.
- Document, document, document!
Make sure you are aware of the decisions made in the company by attending the meetings, have written guidelines on decision making, document everything and inform others if there is something unusual that you have noticed. If the board makes a decision that you find unacceptable, state it clearly and have it documented in writing. This way you may save yourself from the personal liability.
Want to learn more about board’s liability and insurances? Riikka Akselinmäki will be discussing more about the topic at our new FiBAN Academy Online training that will be launched in November! Follow FiBAN’s social media and newsletter to stay tuned.
More information:
Riikka Akselinmäki, Head of the Department, Fennia, riikka.akselinmaki@fennia.fi
Johanna Ahtiainen, Training and Development Manager, FiBAN, johanna.ahtiainen@fiban.org
Fennia Group provides various risk management and insurance services for enterprises, their personnel, entrepreneurs, and private households, as well as flexible client financing solutions. Fennia’s top-ranking expertise and comprehensive operating concept with services tailored to individual needs ensure the client’s safety in all situations.