Langham Hall Spring 2014: What is Directors’ and Officers’ Liability Insurance?

In this guest article Tom Monk, a professional risks broker from the Paul Napier Ltd, will talk about Directors' and Officers' insurance for private funds. Tom and his colleagues advise funds in Europe and Asia in obtaining the most suitable cover for their needs. In this article Tom will explain the nature of Directors' and Officers' insurance from the ground up.

What is Directors’ and Officers’ Liability Insurance?

Directors’ and Officers’ Liability Insurance is a legal defence insurance policy, designed to provide the company or the individual Directors and Officers with the financial assistance to fund a defence should a claim arise. 

What exposure does a Fund Director or Officer face?

Fund Directors and Officers have a unique responsibility, which arguably exceeds that of a Corporate Director or Officer. Irrespective of how well the firm is run, no company is immune from the management liabilities that arise in the day to day running of a sophisticated financial operation. For example, should a mistake be made in the financial reporting or performance of a Fund, the Directors and Officers can be held personally responsible given their fiduciary duty towards the entity. Other common factors in a Fund Directors’ and Officers’ Liability Insurance claim include, but are not limited to, the following types of Wrongful Act: mis-management, employment practices violation and breach of duty. In summary, a Directors’ and Officers’ Liability claim must allege 
some form of wrongful or criminal act or omission by a Director or Officer in the role. The most common actions and potential claimants include: Investors

  • Transaction counterparties
  • Lenders
  • Employees
  • Regulators
  • Claimants against portfolio companies

What exposure does a Fund Director or Officer face?

A Fund Directors’ and Officers’ Liability Insurance policy is used primarily as a first line of protection and to finance the defence costs and personal liabilities of Directors and Officers should a claim arise. Even if a potential claim/circumstance has no validity, a Fund Directors’ and Officers’ Liability Insurance policy will respond and cover initial costs and expenses. In addition to coverage afforded to the individual, a standard Fund Directors’ and Officers’ Liability Insurance policy will offer a reimbursement provision should the fund make a payment on behalf of a Director or Officers. In this regard the indemnification agreement in place between the Company and the Director or Officer will be the determining factor. If no cover is in place at this critical juncture, any Director or Officer named will be forced to fund their own defence, with any corresponding awards payable out of their own pocket. 

What level of cover should we buy?

This is a question we are asked on a regular basis. There is no exact science to setting the limits each Fund should choose to buy and this is usually determined by the Fund Directors as a group and their level of comfort. Some of the key considerations in purchasing Directors’ and Officers’ Liability Insurance include, but are not limited to the following:

  • Number of Directors – As most policies are aggregated, the overall Limit of Liability purchased will be for the group of Directors as opposed to an individual basis. Ascertaining suitable limits based on Director numbers is a key consideration
  • Investor Domicile – Should investors be domiciled in the United States for example, given its litigious nature, the likelihood of a claim is arguably more feasible. Irrespective of culpability, expense costs can multiply meaning a higher Limit of Liability hould be considered.
  • Fund Size - The size of the Fund can dictate the level of cover Directors are keen to purchase. Simply, larger funds on the whole have more investors which in turn makes a claim more likely.
  • Demands from investors - We have seen numerous examples of potential investors demanding certain levels of Directors’ and Officers’ Liability Insurance before committing any capital. While this may occur on a case by case basis, it is particularly prominent for new funds and something to consider.

As a working example, an Investment Manager in Hong Kong recently purchased a USD 15 million Fund Directors’ and Officers’ Liability Insurance policy for their soon to launch USD 300 million closed end fund. We were able to discuss and present a range of options, starting from USD 1 million worth of cover right up to USD 50 million. On a case by case basis we will look to present a range of alternatives for consideration.

For further information or to discuss obtaining cover, please contact me, Tom Monk, at the contact details above.