D&O insurance

What it means

D&O insurance covers the personal liability of members of the statutory body and other senior officers for loss caused in office, including the cost of defending a claim. The company pays the premium, but the insured party is the individual.

It differs from the company’s own liability insurance in whom it protects: that one answers for damage caused by operations or by a product, while D&O answers for management decisions. A claim against a director reaches their own assets.

Besides directors and board members, the insured usually include supervisory board members, procurators and senior managers, often future and former ones too. Intentional acts and fines imposed on the individual are normally excluded, so the cover protects against errors of judgement, not against fraud.

How it works in practice

In Slovakia a director’s liability most often opens up over a late insolvency petition, books that were never handed over, or a payment that stripped the company of resources while it was in crisis. The claim is brought by the company, the trustee or a creditor.

Liability policies carry no proportional cut for underinsurance as property policies do, because what decides is the agreed limit. The limit also funds the defence, so a long dispute can exhaust it before anyone decides whether the claim was good.

When the policy is taken out the insurer asks for the latest financial statements and a questionnaire on known circumstances that could lead to a claim. While preparing the documents we warn the client that any circumstance the director knew of and left out will later be excluded from cover.

What to watch out for

These policies work on a claims-made basis. If a director leaves and the company neither renews the cover nor buys an extended reporting period, a claim about their years that arrives twelve months later is not covered, and the former director pays for the defence.

Some policies exclude claims brought against a director by the insured company itself or by its shareholder. Yet in Slovakia it is precisely the company, or the insolvency trustee acting for it, that sues directors most often, so a policy without a carve-back for such claims protects against the less likely risk.