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25.01.21

PII v. D&O Insurance

What’s the difference? What’s the confusion? Do I need both?  Read here to find out more..

You’ll have your Professional Indemnity insurance (“PII”) in place and may consider this a mandatory expense in order to do business. Your PII policy is there to protect the company against allegations of negligence, errors or omissions from the professional services provided by you, your colleagues and your staff. Claims can arise through a failure in the professional duty of care that is expected i.e., a breach of contract between your firm and your client.

PII is for mistakes the business makes, but there are numerous other areas where those personnel running that business can make mistakes, errors of judgement or simply bad decisions for which they, themselves can be held personally liable. PII will not protect individuals in such instances and so additional, entirely separate insurance policy cover is required.

Directors’ & Officers’ (D&O) Indemnity

D&O insurance (sometimes referred to as Management Liability insurance) is designed to provide financial assistance should senior members of your business require legal costs to be covered where a claim be made against them for any “wrongful acts”.

Similar to your PII, a D&O policy is purchased by the company and arranged in the company name, but the fundamental difference is it provides important financial protection to the individual directors, partners and managers for their day-to-day decisions and actions in running the business. Such persons have numerous fiduciary, common law and statutory requirements and obligations to comply with, a failure of which can expose those individuals to personal financial ruin if they have insufficient funds to defend themselves.

A director cannot hide behind the limited liability of the company, nor necessarily rely on the business to indemnify them. A director has unlimited liability for the position held, and their personal assets could be at risk.

In today’s litigious environment, the decisions made by directors are becoming challenged more often and the risk of allegations of “wrongful acts” increases, no matter how spurious, and without insurance protection the cost of the legal defence and any subsequent settlement can prove disastrous for the individual.

Who Can Bring a Claim?

Many owners of Small Medium Enterprise (SME) private companies believe they are immune from such actions as they only envisage shareholders of a company being able to sue – and if they are both director and the shareholders, why do they need D&O insurance? There is however a myriad of potential D&O claimants who may have a right to bring a legal action against director and senior management.

A wide range of stakeholders (both individuals and organisations) can be affected by the decisions of those within a company. Some may have incurred direct financial loss as a result, others may be enforcing rules and regulations on the directors. The range of potential claimants includes shareholders, investors, regulatory bodies, HMRC, Health and Safety

Executive, employees (past and present), customers, competitors, banks, lenders, liquidators or auditors.

The Cover

The policy pays on behalf of the directors and managers to protect their personal position and ultimate personally liability from claims. It provides access to a limit of indemnity and the safety net of legal experts and appointed representatives, with cover for damages and legal costs incurred in defending an action.

In addition, many insurer wordings now expand the basic scope of protection and provide extras – for example, including employment practices liability, crisis management, official investigation costs, retired directors and for “outside” board positions held.

Summary

One of the main differences between PII and D&O policies is the capacity in which the wrongful act, which gives rise to the claim, is committed. If by the company (under contract) then it’s your PII. If in a personal capacity, for a much wider duty of care and scope of exposures, then it’s the individual and a D&O insurance.

Cox Mahon are specialist insurance brokers for professional and executive risks. Contact us today for more information on D&O insurance, including claims examples, or a non-obligation request for a premium quotation.