Beyond the boardroom: Who is Directors and Officers insurance for?

Often seen as the backbone of the economy, there are 5.64 million businesses with up to 49 employees in the UK ¹. But, even where a business started out in the spare bedroom or every employee is a member of the family, it’s still at risk of being sued.

Without the resources and financial reserves of a larger company, legal action can be extremely damaging for a small business. Defence costs can be crippling and, with every person key to operations, dealing with a case can divert attention from running the business, potentially affecting sales and profits. 

But size is irrelevant in the eyes of the regulators. Fail to put the correct health and safety measures in place or breach environmental regulations and a small business owner can find themselves in court. 

Even if it’s a family business, the regulators will expect the same standards as for a large corporation. For instance, the owners of a family farm could be prosecuted by the Environment Agency if it finds inadequate slurry storage led to pollution of watercourses. 

Small businesses could also face legal action from employees. Without in-house HR expertise, employment practice claims such as sexual harassment or wrongful dismissal can be more common and result in significant settlements. 

Additionally, while a small business is unlikely to have a stock market listing, many will have investors and creditors with an interest in the success – or failure – of the enterprise. If they suspect the business is struggling or being badly run, they could lodge a claim to protect their interests.    

Even without any claims, small businesses can benefit from the services, such as legal and HR support, included on D&O policies. Many struggle to access legal services with research from the Legal Services Board finding that although 32% of small businesses have a legal issue annually ², only a quarter seek professional advice. Being able to get professional advice quickly, can prevent a business owner or manager ending up in court. 

Nearly 40,000 medium sized businesses operate in the UK ¹. These have between 50 and 249 employees and represent a diverse range of sectors from manufacturing and construction through to entertainment and property management. Legal action is common among medium-sized businesses too, with research by Fair Civil Justice ³ finding that 15% of UK SMEs had faced legal action in the five years to 2023. 

Claims could come from regulators. For instance, the directors of a construction firm could find themselves in court if an employee is injured and the HSE investigation finds it was caused by a lack of compliance with health and safety legislation.

Investors and customers could also take action against company directors. If an entertainment business suffers a cyberattack, even the IT and insurance managers could find themselves in the firing line if investors claim the company didn’t have adequate cybersecurity or insurance.   

Growth plans, which are common among ambitious medium-sized businesses, can also be a trigger for D&O claims. Following a merger or acquisition, investors may be unhappy about the direction of the business. Similarly, the new company could turn on former directors, claiming they made false statements about the financial state of the business.  

Without the support of in-house legal and HR teams, these scenarios can be particularly damaging for medium sized businesses. Fair Civil Justice ³ found that 90% of those who’d faced legal action said it had a detrimental effect on their business, including reputational damage, pressure on employee capacity and less appetite for risk around business decisions. 

Knowing a D&O policy is in place can protect your business from costs associated with this damage. As well as providing support through any claim, it also gives senior management more confidence to carry out their responsibilities without feeling they need to adopt an overly cautious approach. 

Government statistics ¹ show there are 8,335 large, private sector businesses in the UK, each employing at least 250 people. 

As many of these businesses are listed on the stock market, every decision taken by senior management comes under intense scrutiny from investors, regulators and other parties such as employees and consumers. This means that D&O is often a standard part of the package for senior executives in large companies. 

This scrutiny also means it’s an area where new types of claims emerge. Examples include ESG-related claims, where activists call directors out for greenwashing and overblown sustainability statements, but also claims around the use, or misuse, of artificial intelligence (AI).

As well as protecting executives from hefty legal bills, D&O insurance can help a business attract talent. Trying to lure a director from a FTSE-100 company is much more challenging if there’s no D&O policy on offer. Few would consider a job move without this protection. 

Many financial institutions fall into the large business category. The strict regulations that apply to their sector mean it’s essential that senior executives have cover. At Allianz, the specialist nature of the cover they require means we can offer D&O insurance through Allianz Global Corporate & Specialty. 

Whether it’s a construction firm with 500 employees, a manufacturing business employing 70 people or a family-owned farm with onsite glamping, arranging D&O insurance for anyone responsible for making decisions about how the company is run can make the business stronger and more resilient.

Our range of products are only available through insurance brokers. Speak to your insurance broker today about Directors and Officers insurance.

Understanding and managing these risks is a key part of running a business. A wrong decision can damage a company’s reputation and hit the bottom line hard. 

Directors are personally liable for their actions, which could impact not just their business, but also their personal assets. With companies facing so much change and uncertainty, keeping informed and having cover in place can provide considerable reassurance to directors and officers.