Running a business carries a high level of risk. In the case of companies limited by shares, wrong decisions can result in adverse financial consequences not only for the company itself, but also for individuals responsible for managing the company’s affairs. For this reason, it is advisable to consider taking out Directors’ and Officers’ liability insurance (D&O Insurance).
D&O Insurance provides protection against the third-party liability of management staff of companies limited by shares. While this insurance is designed specifically with management board members in mind, it may also be used, depending on the provisions of the particular contract, by members of supervisory boards and audit committees, liquidators, chief accountants, and other persons involved in running a company. Its principal purpose is to provide insurance cover against the risk of third-party claims (and also claims brought by their own company) for compensation for damage suffered due to the wrong actions of individuals covered by this insurance.
The responsibilities of management board members frequently call for making tough decisions that carry significant economic risk, but such decisions are often indispensable for ensuring the further development of the company. In such contingencies, D&O Insurance may provide an umbrella of protection for the company and for people running its affairs. Management board members, as well as other individuals covered by this insurance, can perform their duties more effectively since they are not stymied in their actions by the fear of being held personally financially liable. On the other hand, the company also benefits from the protection because when exposed to damage, it is able to claim compensation from the insurer to offset the adverse effects of actions by individuals managing its business. For these reasons, it is not just managerial staff, but also companies that may be interested in taking out D&O Insurance and that can benefit indirectly from the advantages provided by such insurance cover.
When the prospective policyholder is a company, it is worth considering all arguments for and against the purchase of D&O Insurance. One possible argument in favor of the purchase is that in the case of damage, the likelihood that the related claim will be satisfied is greater with an insurance company than with an insured private individual. However, an argument against the purchase of the insurance is the associated expense and the fact that having such a guarantee may incline the insured individuals to be less attentive in running the company’s affairs because of the assurance that they would not be liable with their own assets in the event of damage.
D&O Insurance belongs to the category of insurance products that are “tailored” to individual needs, which accounts for considerable differences among its available variants. Therefore, you should carefully study the provisions of insurance contracts and consult experienced lawyers if you have any doubts.