What is directors and officers (D&O) insurance?

Full answer

Directors and officers (D&O) insurance protects the individuals who run a company, rather than the company itself, from the personal financial consequences of claims relating to how they carried out their role. **What it covers** D&O insurance typically covers legal defence costs and any damages or settlements arising from claims that a director or senior officer breached their statutory or fiduciary duties, made a negligent decision, mismanaged the company, or breached employment or regulatory law in their capacity as a director. Claims can come from shareholders, employees, regulators, creditors, or competitors. **Why directors personally need protection** Under UK company law, directors owe statutory duties to the company (under the Companies Act 2006), including duties to act within their powers, promote the success of the company, and exercise reasonable care, skill and diligence. If a director is found to have breached these duties, they can in some circumstances face personal liability -- separate from the limited liability protection that shields shareholders from most company debts -- which is exactly the exposure D&O insurance is designed to cover. **Who typically needs D&O cover** Company directors of any size of business can benefit from D&O cover, but it becomes increasingly important for companies with external investors, multiple shareholders, significant regulatory exposure, or those preparing to raise investment, since investors and venture capital firms often require D&O cover to be in place as a condition of investment. **What D&O insurance does not cover** D&O policies typically exclude deliberate fraud, dishonesty, or criminal acts once proven (though they may cover defence costs until such findings are made), and do not remove a director's underlying legal duties -- the insurance covers the financial consequences of an allegation or genuine mistake, not deliberate wrongdoing. **Worked example** A shareholder sues a company's directors, alleging a decision that led to significant financial loss was negligent. Even if the claim is ultimately unsuccessful, the legal defence costs alone could be substantial -- D&O insurance would cover these costs, protecting the directors' personal finances during the process. **Practical tip** If you are appointed as a director, particularly of a company you did not found, check whether adequate D&O cover is already in place before accepting the role, since your personal financial exposure could otherwise be significant.

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