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This type of insurance is only applicable to practices organised as a company. It covers the personal liability of directors, officers, and usually, employees, where a third party suffers loss from their act or omission in fulfilling their duties in relation to their role or functions in the company. It is not a substitute for the practice’s professional indemnity (PI) insurance, but covers risk of negligent failure in corporate governance, compliance with statutory duty in relation to company management, and the like.
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Directors and officers insurance covers personal liability and the company’s liability to reimburse the defence costs to the insured person where the individual because of the office they held, is shouldered with personal financial liability, or the company has agreed to indemnify the person for these costs. It is not usually relevant to small privately-owned companies, where the directors are the primary shareholders and the fortunes of the company are intimately connected with them, as individuals. It is usually only relevant to larger companies where there are directors or officers who are salaried without ownership, or have substantial, but not controlling ownership in the company, or even who are only paid director’s fees yet have significant personal financial risk if sued, or prosecuted by an authority, as the director/officer responsible for the actions of the company. Whether or not this insurance is necessary or cost effective for your practice will have much to do with the presence or not of these factors, so you should get advice from your insurance broker.
Standalone directors and officers insurance is usually taken by publicly listed companies or large private companies with outside shareholders and/or non-executive directors. Typically, private companies such as architectural practices should consider management liability insurance. Management liability insurance comprises a number of sections including directors and officers insurance. Other covers include employment practices liability and statutory liability.
Directors and officers insurance is not available to a partnership because partners are jointly and severally liable for the practice’s liability no matter which partner’s act or omission triggered the liability so individual partners cannot be insured against liability, and partnerships are not subject to the governance legislation that applies to companies which can make individuals personally liable under that legislation for the partnerships actions. Therefore, individual liability of partners is insured indirectly through the coverage of the other insurances held by the practice, such as PI, public liability and any other insurance held by the practice. Partnerships can take management liability insurance.
Directors personal insurance
Business continuity planning requires that consideration be given to the potential for one of the directors to be unable to perform their duties due to illness, disability or some other cause. Some of these causes can be insured against.
Personal accident and illness
When a principal or key staff member of a practice is disabled by an accident or sickness, the earning capacity of the practice can be seriously interrupted. In the case of a sole practitioner, the practice can come to a standstill.
There are two main types of cover available for this class of risk:
1. Illness or trauma cover
Personal accident insurance is generally available on a worldwide basis and provides cover 24 hours a day. The sum insured is a selected lump sum for accidental death, total permanent disability, loss of sight and limbs, etc. Weekly benefits, generally limited to 104 weeks, are also available.
Illness cover pays selected weekly benefits for the period of disability up to 104 weeks. Medical certificates must be provided to substantiate the period of disability for accident and illness claims. These types of policies are cancellable by the insurer if the insurer changes its mind about risk, for example, on deteriorating health.
2. Disability insurance
Disability insurance is designed to provide a monthly benefit against the risks of accident and illness and generally offers worldwide cover.
There are a wide range of options, such as accident benefits payable for life or limited to 60 years or 65 years of age, and these benefits may be 'bundled' with illness benefits payable for two or five years or even longer. Optional excess periods are available.
The advantage of such a policy over illness or trauma cover is that, in the event of the insured's health deteriorating, insurers are unable to cancel the policy.
Key person insurance
Key person insurance protects the practice against the loss of a partner or other key member of the practice. The insurance may cover the loss of the potential earnings of the key member, however could also be structured to allow the remaining partners to use the proceeds to buy out the shareholding of a partner who becomes incapacitated and not able to work or of one who dies.
Disclaimer
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