Since the introduction of the King III Report and Code of Governance and the introduction of the Companies Act in 2008, Directors and Officers Liability Insurance has been rendered crucial for all companies regardless of size or incorporation, and mandatory when a Board of Directors is assembled.
What does Directors and Officers Liability Insurance cover?
Wrongful acts such as breach of duty, error, omission, misstatement, sexual harassment, defamation, wrongful termination are typical areas of cover. The insurance protects the individuals’ personal assets, spouses, heirs and estates from claims against them for damages caused by a wrongful act.
In addition, the policy will cover costs, charges and expenses incurred for defence of allegations of criminal acts, wilful misconduct, reckless trading, and breach of trust. These costs however shall be repaid should the defence be unsuccessful.
It is simply not enough that companies try to mitigate this risk by tight controls, as a suit could be filed against an individual for arbitrary or malicious reasons and the defence costs alone in such a case could be crippling.
Case Study
The claimant was dismissed from her employment for gross misconduct on the grounds of her failure to pass a test. The claimant subsequently sued her former employers together with a number of colleagues one of whom was deemed to be an Officer of the company, alleging sexual discrimination and sexual harassment. The complaint was ultimately settled for R650 000, without defence costs
Case Study
A former employee discovered illegal transactions involving retirement funds. Shortly after reporting the violations, she was retrenched by her employer. She filed a suit for wrongful termination. The total loss exceeded R1,000,000.
Who is exposed?
- Past, present and future Directors
- Employees and volunteers in a managerial/supervisory capacity, audit committee, risk committee
- President/CFO/CEO/Company Secretary
- Non-profit organisations: President/Secretary/Treasurer
What is at risk?
- Personal liability: property, cars, assets, savings, pension funds are at risk
- Spouse, heirs and estates (may be named in a suit)
- Financial implications of defence costs could be crippling
- Should your assets be frozen are you able to cover costs of schooling, housing, utilities and personal insurance
Extent of exposure
- Minor allegations to large class action suits – risk of catastrophic financial loss
- No other insurance policy will cover D&O exposure
Where do claims come from?
The most common suits filed against Directors and Officers of companies come from shareholders, employees, competitors, regulators/government, customers, liquidators/administrators and creditors.
Any error or omission effecting one of these parties can put the individual’s personal assets at risk, and insurance for this exposure is vital.
