Directors' and Officers' Liability

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Directors' and Officers' Legal Liability Insurance
Document Date: 03-August-2006

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1. High profile claims
2. Duty of directors
3. What is D&O Liability Insurance?
4. What are the wrongful acts?
5. Who is covered under the policy?
6. Why should I buy this cover?
7. Who may sue the directors and officers, and why should they sue?
8. How is the premium calculated?
9. What are the usual exclusions?
10. How do I defend a claim?

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1. High profile claims

Recently, the directors of the National Kidney Foundation were sued for not exercising due care in their duties. There are many directors of other companies that were sued for negligence in the past, sometimes through no fault of theirs. These claims can be covered under a Directors' & Officers' Legal Liabilty Insurance.

2. Duty of directors

The directors are required to exercise due care in the exercise of their duties. If they fail to do so, they can be made personally liable for the loss. Their personal assets can be seized to pay the judgment sums. If they are unable to satisfy the judgment, they can be subjected to bankruptcy proceedings.

The directors are jointly and severally liable. Other directors sitting on board can be sued together because of the wrongful acts of one director.

The litigation process can last for many years and can be very costly. This is stressful to the directors. The duties placed upon the directors are ever-changing and increasing. They can be protected against this liability under Directors' & Officers' Legal Liability Insurance.

3. What is D&O Liability Insurance?

This is a policy designed to protect the directors and officers for the amount that he becomes legally bound to pay for claims made against him for wrongful acts (see Question 4) committed during the period of insurance and in the course of him managing the company.

The cover pays for the defence costs, out-of-court settlement and the court award for civil liability. Defence costs for criminal liability may also be covered if the director is found innocent of the charges.

4. What are the wrongful acts?

Wrongful acts are broadly defined as actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other wrongful acts committed by the directors or officers in their respective capacities in managing the company.

5. Who is covered under the policy?

All past, present and future directors and officers are covered. Directors have to be properly appointed under the Companies Act (Or Society Act if the Insured is an Association). Officers are employees occupying a management or supervisory capacity.

6. Why should I buy this cover?

A D&O policy is a protection for the directors and officers of the company who are personally liable for their acts. This cover will provide peace of mind to the directors so that they can manage the company well in utmost good faith. Directors and officers cannot prevent third parties (See Question 7) from suing them. Where they are sued upon, this policy will pay for the costly defence costs, and if need be, pay for the out-of-court settlements and court awards.

The D&O policy also serves to attract high quality people to serve on the board of director, and benefits the company since it can recover the expenses they have incurred in indemnifying their directors and officers. In fact, D&O policy is a good risk management tool of any company.

7. Who may sue the directors and officers, and why should they sue?

• Shareholders - drop in share price as a result of min-management or mis-statement
• Employees - wrongful termination, breach of employement contract
• Regulators - dishonesty, fraud and envirnomental liabilities
• Creditors - debt collection
• Customers / Suppliers - contract disputes as a result of mis-statement
• Competitors - copyright and/or patent infringement
• Others such as receviers, liquidators and professional consultants

8. How is the premium calculated?

As a rule of thumb, the following is a guideline for the average size entities seeking for a S$1,000,000.00 limit cover

Associations: S$450~S$750 Non-Listed Companies: S$600~S$1,350 Listed Companies: S$1,000~S$2,500 (dependent on the nature of industry)

A firm and binding quotation can be made available upon receipt of a completed and signed proposal form and the last 3 years annual report.

9. What are the usual exclusions?

The policy does not cover:

• criminal conduct, such as fraudulent or dishonest acts
• professional indemnity, bodily injury, property damage
• punitive or exemplary damages
• fines or penalties
• all known claims, circumstances and allegations that may lead to a claim at policy inception date

10. How do I defend a claim?

First you have notify NTUC Income within 30 days of any claims made against you, or any circumstances which may give rise to wrongful acts (See Question 4). NTUC Income will engage a loss adjuster or lawyer to defend the claim. You will have to render your co-operation to defend the claim. You may wish to propose your lawyer to represent you, subject to NTUC Income's approval.