Oct 27, 2011

The differences between Directors and Officers Insurance and Errors and Omissions Insurance

Directors and Officers Insurance is often confused with Errors and Omissions Insurance, but the two are not synonymous. They apply to different circumstances and you will need to ensure you have the right cover for your role.

Directors and officers insurance protect the director and officers of a company from financial liability in the event of a claim regarding perceived failures in their performance and duties as managers. Errors and omissions insurance are concerned with negligence or failures in the provision of products and services. In practice, both will often be required.
Directors and Officers insurance vs. Errors and Omissions cover
Errors and omissions insurance relates to the provision of a company’s products and services, whereas directors and officers insurance operates in the area of the performance and duties of management. Errors and omissions insurance is generally required by people who provide services directly to clients, like lawyers and insurance agents, whereas directors and officers insurance is designed to protect the company’s decision makers. Some people like to think of D&O insurance as E&O for managers.

Directors and officers insurance apply to a wide range of circumstances, so it is worth ensuring precisely which eventualities your policy covers. Claims might be auctioned by shareholders, employees or clients. D&O is necessary because such claims are made against both a company and against the directors of the company. Directors can be held personally responsible for acts carried out by the company, meaning that they can be financially liable in the event of a claim. Few directors or officers are willing to accept this as a condition of employment. When a company assembles a board of directors, they will frequently require D&O insurance first, in order to protect their personal assets. Similarly, directors and officers insurance are usually necessary before funding can be secured from venture capitalists or other investors.

What circumstances do directors and officer’s insurance cover?
From its humble and limited beginnings in the 1930s, directors and officers insurance has expanded rapidly in recent years and now covers a wide range of eventualities. In general, it applies to circumstances where directors are considered to have failed or been negligent in their management duties. For example, in the past decade claims have increasingly arisen from shareholders who are disappointed in the performance of a company’s stock. Another situation might be mergers and acquisitions insurance. In general, shareholder litigation is a growing problem, especially for companies with a US exposure.

Another expanding area and a frequent addition to directors and officers insurance policies is Employment Practices Liability. Employment practices suits now account more around half of all D&O insurance claims. This component is necessary so that directors are not held responsible for claims brought by employees and certain third parties. Such claims can arise from wrongful dismissal, failure to promote an employee, sexual harassment and other breaches of employment or discrimination laws.

These are just a few examples, and in practice there is a wide range of circumstances in which directors could be held personally and financially liable for failings on the part of their company. Others include breaches of the Data Protection Act, health and safety breaches, pollution, and corporate manslaughter.

Conclusion
Errors and omissions insurance cover negligence or failure in the provision of products or services, and are generally applicable to those who provide these directly to clients. Directors and officers insurance apply to a company’s decision makers, and protect them from personal liability in the event of claims resulting from failures in their duties as managers. D&O covers a wide range of eventualities, from the performance of stock to employment practices suits for wrongful dismissal or sexual harassment. A company will usually need to have D&O insurance in place as a condition of funding by investors and by the board of directors. In practice, both types of insurance will probably be necessary, but the two cover different circumstances and should not be confused.

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