Factors to consider for Directors Liability short-term insurance

Increasing incidences where executives and directors of businesses are being held personally liable for their role in suspected mismanagement or gross negligent decision making have escalated the importance of Directors and Officers Liability short-term insurance.

Malesela Maupa, Head of Insurer Relationships at FNB Insurance Brokers, says the Companies Act allows for Directors and Officers to be held personally accountable for alleged negligence or damages suffered due to corporate governance failures.

This means that the executives or directors of the business can be held legally liable by business’ internal and external stakeholders which by implication can attach their personal assets, such as property, trust accounts, pension funds, shares, investments and so forth.

“Although there is no legal requirement to have this cover in place, the onus is on Directors and Officers to ensure that their respective businesses have short-term insurance to offer some protection against such risk exposures. This is to protect both the organisation against any legal action that may impact it financially as well as Directors and Officers,” adds Maupa.

Maupa shares important factors to consider when taking up Directors and Officers Liability Insurance:

• Who should be covered in the business – all senior members of the organisation who may be taken to task legally for negligence, key decision making and potential mismanagement should be insured. This could be Directors, Executives, Chief Operations Officer and Senior Managers etc.

• Can employees be held accountable after leaving the business - fundamentally this type of cover should strategically be deployed as part of a broader risk management plan which considers past, present and future Directors and Officers.

Businesses often overlook that Directors and Officers can be held liable for their involvement with the organisation even if they have moved on.

• Does size matter – there’s a common misconception that Directors and Officers Liability insurance is only relevant for large organisations. Even businesses with a lower annual turnover would require this type of cover, as the business could potentially face significant financial losses should it be embroiled in lengthy legal proceedings.

• Are there any exclusions – common exclusions on these types of short-term insurance policies include fraudulent activities, illegal conduct and professional indemnity, amongst others.

It is important to note that the exclusions may vary depending on the insurer and type of business.

“Lastly, before a business decides to get this cover, it would be advisable to consult a broker who would be able to assess the needs of the business and advise on suitable cover. Moreover, the broker would also advise the business on the type of exclusions it faces and whether there is a need for top up insurance,” concludes Maupa.