A guide: practical tips on D&O and indemnities
06 July 2022
Indemnification and insurance products: understanding the gaps
The two key protection products available to senior managers and directors are D&O insurance and indemnities. There are legal restrictions governing what businesses can indemnify their directors and officers against, but both D&O policies and indemnities can be complex and, of course, their exact details will vary by underwriter.
With more than one way of getting protection, directors need to be mindful of how their D&O policy coordinates with their company’s indemnification obligations. There are important lessons to draw from the gaps that exist between these two protection products, as the table below shows.
Gaps in a D&O insurance policy
- Applies to Directors and Officers only, subject to policy wording.
- D&O is designed to respond to liability for claims (including defence costs) made and investigations commenced against directors in a particular period of insurance. As such it provides limited, if any, protection in the absence of a claim or investigation directly involving the individual concerned. Cover is often complex and comes with built in restrictions and exclusions.
- The insurance limits themselves are usually shared between a large group of individuals which is not restricted to senior executives (and often includes the company itself).Hence the limits are prone to rapid depletion and even exhaustion.
Gaps in a company indemnity contract
- Applies to all employees and officers of a company who are not also directors (or statutory auditors).
- An individual has no automatic right to indemnity.
- Such rights to indemnity as he or she may have, may be further limited by:
- statutory restrictions
- the terms of any relevant contract (or deed poll)
- the company’s willingness and appetite to indemnify based on:
- its perception of the facts on the ground in each case, and
- whether the senior manager is still in post when the indemnity is called upon.
- The company indemnity will be worthless in the event of company insolvency. The indemnity may not continue after the individual has ceased to be employed. Even if it does, the terms may not be as generous.
The most common trigger for a covered insurance claim is an allegation made against an individual that he or she has committed a wrongful act in a management or executive capacity. Whilst it is dangerous to generalise, most good D&O policies will also provide protection to directors who are either the target of a regulatory investigation or who are required to attend an interview in the context of such an investigation.
What can executives do?
Senior managers and directors can and should prepare for regulatory focus on their individual conduct. A useful starting point would be to take responsibility for clarifying one’s own responsibilities and reporting lines, as well as understanding the detail of the personal liability protection available through D&O insurance or employer’s indemnity.
To help, below is a checklist that covers the most important questions that senior individuals may wish to consider with their employers.
1. With which categories of employee, at what level of seniority, do I share the D&O limit purchased by the company on my behalf?
2. Is my D&O limit also shared with the company itself and, if so, in what respects and to what extent?
3. Is access to my D&O insurance policy dependent on a failure or refusal by the company to indemnify me?
4. Does the company agree to indemnify me in respect of all legal expenses (including, where I consider it necessary, seeking independent legal advice) in my capacity as a senior manager, to the extent legally permissible?
5. In pre-enforcement dealings with regulators, what cover (if any) is available to me to seek independent legal advice under the employer’s D&O insurance programme?
6. Will there be cover for internal investigations?
7. Will there be cover for travel expenses for meetings with regulators (both in the directors’ home country and abroad)?
8. Is the indemnity wide enough to cover all board appointments (including appointments to clients, any joint ventures or subsidiaries which are not wholly owned)?
9. If the answer to 4 and/or 5 above is ‘No/None’, has the company considered purchasing additional legal expenses for me in pre-enforcement dealings with regulators?
10. What restrictions are imposed (both by indemnity and insurance) on my freedom to select lawyers of my choice and in the conduct and control of my defence?
11. Does the policy provide a mechanism under which insurers will advance all defence costs and legal representation expenses to me, pending resolution of any dispute between the company and the insurers as to the extent of such costs ultimately covered under the policy?
12. What protection do I have against future claims against me if I retire or resign during the policy period, or if during such period the company is the subject or object of mergers and acquisitions activity?
13. Does my D&O policy contain provision to enable me to take proceedings to clear my name in appropriate cases?
A company indemnity vs. a D&O insurance policy – what can they do for you?
What only a D&O insurance policy can do for you
Only a D&O insurance policy can provide protection in the form of:
- defence costs cover (civil, regulatory and criminal proceedings), with no repayment risk in the event of the director being found to have acted wrongfully unless they are found to have acted dishonestly or fraudulently;
- cover for director/officer liability to the company or an associated company. The law precludes a company from providing a director with indemnity protection in respect of liability to the company itself, so a D&O insurance policy can provide a broader range of indemnity protection than a company indemnity can do;
- a source of indemnity protection that is independent of the company, thus removing the conflict problems that arise when the company is involved in the claim against the director; and
- a source of indemnity that is available even if the company has become insolvent (rendering any corporate indemnity valueless).
What only an indemnity contract with the company can do for you
Only an indmenity agreement can, subject to its terms, provide protection in the form of:
- an uncapped indemnity;
- no policy exclusions (though most indemnities do include a number of conditions);
- no insurer payment refusal/default/insolvency risk; and
- a long-term indemnity assurance, which is not subject to annual renegotiation, and thus to the risk of change or cancellation
But restrictions imposed by law on the scope of what is permitted by way of indemnification to a director mean that an indemnity contract for a director is likely to be more limited in its scope, and that defence costs are only available as incurred on the basis of a loan, which could potentially have to be repaid if the director’s defence fails.
What neither D&O insurance nor company indemnity can do for you
- liability arising by reason of the director’s dishonest, fraudulent or criminal conduct; or
- criminal fines or regulatory penalties.