Directors & Officers Liability Insurance

What is Directors’ & Officers Liability Insurance?

Directors’ and officers’ insurance, also known as D&O insurance, is a type of liability insurance that protects the directors and officers of a company from legal action taken against them due to their actions or decisions as leaders of the organization.

This type of insurance is particularly important in the United Arab Emirates (UAE) as the country's business environment can be complex and litigious. With the start-up ecosystem picking up pace and investments coming in, having a D&O policy becomes mandatory. 

D&O Insurance covers defence costs incurred by board members, managing directors and employees against claims by shareholders or third parties for alleged misconduct. D&O insurance also covers monetary damages, settlements and arbitration awards resulting from instances.

If the company cannot indemnify its directors, officers or employees for amounts arising from these claims, D&O Insurance pays these costs and protects the individual's private property. However, if a company incurs them then its D&O insurance will reimburse such expenses. The D&O policy also provides some protection for the company itself if the company is sued.

Who needs D&O Insurance UAE?

Directors and officers of any organization of all sizes including but not limited to start-ups, non-profit or for-profit, should consider purchasing D&O insurance. This includes corporate officers and board members, as well as executives, managers, and supervisors.

Moreover, companies in the UAE in the following areas should also consider placing a D&O policy

• Public companies of all types and sizes 

• Financial institutions including hedge funds, investment advisors, venture capital and private equity firms. 

• Non-profits

• Mid-sized private companies

• Companies seeking funding through various channels such as equity, debt, VC’s etc. 

• Companies planning an IPO or active with mergers and acquisitions.

• Companies with distressed financials, undergoing a restructuring and/or those emerging from bankruptcy

• High growth companies and companies looking to expand into new products, countries or sectors

• Companies impacted by economic movements/downturns

• Companies in industries such as Manufacturers and brands, technology companies, financial firms and institutions, healthcare, and life-science companies.

Why get Directors & Officers Insurance UAE?

Apart from the standard forms of indemnifications provided by a D&O policy, companies are also often required to place D&O insurance due to the following scenarios

• Contractual requirement when approaching venture capital or private equity firms

• Worried about the company`s financial stability and the need for strong balance sheet protection

• The need to attract (or retain) more qualified directors and executives for expansion

• A change in regulatory climate such as new regulations or increased scrutiny. For example, Companies nowadays are increasingly being watched by government agencies for ESG (Environmental, social and governance) parameters and cyber security compliances in UAE and world over.

• Financing requirements when approaching creditors

• Future planned IPO's and/or M&A (mergers & acquisitions) on the cards.

Common risk scenarios

• Breaches of fiduciary duties owed to the company and shareholders

• Shareholder actions

• Reporting errors

• Derivative shareholder/investor claims

• Direct shareholder/investor claims

• Regulatory investigations/actions

• Inaccurate or inadequate disclosure

• Misrepresentation in a prospectus

• Failure to comply with regulations or laws

• Corporate manslaughter

• Creditor claims

• M&A litigation

• Competitor claims

• Employment practices and HR issues

Major Inclusions of D&O Insurance: 

D&O insurance typically offers coverage for:

1. Coverage for all directors and officers – The coverage is extended to all existing and future directors and officers. 
2. Legal Expenses: D&O insurance in UAE provides coverage for legal expenses incurred in defending a legal action or investigation including but not limited to damages to be paid (awards passed by the court via final adjudication)
3. Prosecution and Reputational Damage: D&O insurance in UAE can also provide coverage for any damage to the company’s reputation or public image due to the wrongful acts or omissions of its directors or officers.
4. Regulatory Investigations: D&O insurance in UAE can also provide coverage for any regulatory investigations that are launched against the company or its directors or officers.
5. Final adjudication coverage: Coverage is provided until the guilt is stablished. In other words, coverage is extended to all forms of allegations / accusations until the final judgment is passed in the court of law.

Major Exclusions of D&O Insurance: 

1. Intentional Wrongdoing - Coverage often excludes any wrongful acts or omissions that are intentionally committed by the insured. 
2. Prior Knowledge - Coverage generally excludes any wrongful acts or omissions that are committed with knowledge of the conduct being wrongful. 
3. Criminal Acts - Coverage typically excludes any losses arising out of criminal acts or fraud committed by the insured.
4. Personal Profit - Coverage typically excludes any losses arising out of personal profit made by the insured.
5. Prior and Pending Litigation - Claims relating to any current/old litigation stands excluded
6. Prior Acts - Claims relating to acts committed before the policy period is excluded.
7. Contractual Exclusion - Claims arising from any oral or written contracts are excluded.
8. "Other Coverage" Exclusions - Claims that are intended to be covered in other policies are excluded this includes: bodily injury claims that should be covered under a general liability policy, cyber-attack claims covered in a cyber-risk insurance, and professional service related claims that should be appropriately covered by a separate E&O policy.

Factors determining the cost of a D&O policy

• Domicile & International activity 

• Claims 

• Industry Sector institutions are considered as high risk 

• Stock exchange listing 

• Market Capitalization 

• Professional CVs of the management 

• M&A activity 

• Nature of business 

• Revenue 

• Sharing holding pattern 

• Total net worth of the company 

• P&L 

• Number of employees (Geographical bifurcation)

At Policybazaar UAE, we take pride in our world-class risk assessment capabilities, enabling us to craft and execute cost-effective risk management strategies through insurance. We are here to provide you with the peace of mind you need to safeguard your business and achieve your future objectives.

Directors & Officers’ Liability Insurance FAQ

Q1. What is covered by directors' and officers' insurance?

Ans: Directors’ and Officers’ (D&O) Liability Insurance covers individuals from personal losses in case they are sued due to their service as a director/officer of any business or organisation. These plans also generally cover the costs related to defence or legal fees in case one is sued for any damages or settlements. 

While the inclusions of D&O Insurance vary as per your provider and the plan, you can expect the following covers - 

• Coverage for all directors and officers 
• Legal expenses incurred in defending a legal action or investigation 
• Regulatory investigations launched against the company or its directors or officers
• Final adjudication coverage

Q2. What leads to claims?

Ans: There are many scenarios that can lead to a claim against a company's director and officers. The list can include their performance, which may bring legal issues with respect to mismanagement, and more. Some other instances where claims are usually made include - 

• Initial public offerings
• Positions on external boards 
• Sexual harassment, unfair hiring practices, or discrimination 

Q3. What is excluded from D&O insurance?

Ans: Similar to inclusions or covers, the exclusions of Directors’ and Officers’ Liability Insurance plans depend on which plan and provider you have gone with. With that said, D&O insurance generally does not provide any coverage in numerous scenarios - this may include breach of contract, punitive damages, fraud, unlawful behaviour, intentional involvement in illegal activities, and more. 

Q5. What is the price of D&O insurance?

Ans: The costs for Directors’ and Officers' Liability Insurance plans vary as per several factors such as the coverage sought, the associated risks, and so forth. For instance, you wouldn't need higher coverage if your directors and officers don't have many significant risk exposures. In this case, you can expect the policy to be reasonably priced. However, if the exposure to legal risks is high, you would be required to go with a plan with higher coverage, which would be considerably costlier.

Q6. What features should a D&O policy have?

Ans: The ideal requirements for a Directors’ and Officers’ Insurance plan would depend on the business. Each firm has particular requirements, risks, financial constraints, and more. For this reason, the initial step should always be to narrow down the focus to your particular case rather than consider the insurance plan. After determining your needs and risks, you can compare D&O policies from various insurers and even customise your policy at the time of purchase.

Q7. Does D&O insurance provide coverage for former directors?

Ans: Yes, the former directors of an organisation are also usually covered under D&O Insurance. As a result, in case any claims are made regarding their conduct while serving their tenure as directors, they would remain financially protected in such instances.

Q8. Does D&O insurance cover negligence?

Ans: Yes, negligence is generally covered by D&O Insurance. This type of insurance will cover any claims against the directors and officers related to any failure in duties due to the issue of negligence.