Understanding D&O and Professional Indemnity Insurance for Board of Directors: Coverage, Liabilities, and Key Differences.
When serving on the board of directors, understanding the nuances between different types of insurance policies is crucial. Two of the most important policies to protect directors from potential claims are D&O (Directors & Officers) Insurance and Professional Indemnity Insurance. In this guide, we will break down D&O vs Professional Indemnity Insurance: Board of Directors' Liability, explaining when each type of policy applies and how it safeguards corporate leadership.
1. Does Your Company’s D&O Insurance Cover You for Serving on Another Company’s Board?
Directors & Officers (D&O) Insurance typically covers directors and officers of a specific company for claims made against them while they perform their duties. If you're wondering how D&O Insurance works for board members, it primarily protects them from personal liability arising from governance decisions.
For more details on D&O Insurance and how it works, click here.
For example:- AZ Firm's D&O Insurance would cover you for claims related to your duties as a director of AZ Firm.- It is unlikely to cover your role at Oz Ltd, as D&O Insurance is generally company-specific. Your position at Oz Ltd would be treated as a separate directorship.
Solution: To protect yourself while serving on Oz Ltd board, you should ensure Oz Ltd has its own D&O Insurance that covers all directors, including yourself.
2. What if Your Company Appointed You to Sit on Another Company’s Board?
If AZ Firm appoints you to serve on Oz Ltd’s board, the situation may differ from a typical directorship. In cases where your company appoints you to an outside directorship, coverage could depend on the terms of your D&O Insurance policy. Some D&O policies include an Outside Directorship clause, which extends protection to directors serving on the boards of other companies at the request of their primary company. This clause ensures that you are covered for decisions made in your external role, provided the D&O policy includes this specific provision.
- If AZ Firm’s D&O Insurance includes an Outside Directorship clause, you could be covered for claims made against you while serving on Oz Ltd board.
- However, this coverage would typically be secondary to Oz Ltd own D&O Insurance, meaning Oz Ltd policy would respond first, and AZ Firm’s D&O would only step in if the limits of Oz Ltd coverage are exhausted.
Action Step: You should check with AZ Firm’s insurer to confirm whether its D&O Insurance includes coverage for outside directorships and any requirements for prior approval.
3. Does Professional Indemnity (PI) Insurance Cover You for Serving on Another Board?
Professional Indemnity (PI) Insurance covers professionals, such as accountants and consultants, for negligence or mistakes made while delivering professional services. It does not cover governance or management roles, such as serving on a board of directors.
For example:- AZ Firm’s PI Insurance would cover you for professional services (e.g., accounting and consulting) provided for AZ Firm’s clients.- It will not cover your role on the board of Oz Ltd, as this is considered a governance role, not a professional service.
Conclusion: Rely on D&O Insurance for protection when serving on a board, as PI Insurance will not apply in this scenario.
4. What Are the Key Differences Between D&O and PI Insurance?
When Are These Policies Triggered? - Understanding the key differences between D&O and PI Insurance can help determine when each policy applies:
Who is Covered?
D&O Insurance: Protects directors and officers from claims related to their management and leadership roles.
PI Insurance: Protects professionals (accountants, consultants) from claims of negligence or mistakes in delivering professional services.
What is Covered?
D&O Insurance: Covers wrongful acts related to management decisions (e.g., breach of fiduciary duty, mismanagement). PI Insurance: Covers errors, omissions, or negligence in professional services (e.g., accounting or legal advice).
D&O Insurance is Triggered:
When directors are sued for their management decisions, such as:
A shareholder lawsuit for mismanagement.
A regulatory investigation involving the company’s leadership.
PI Insurance is Triggered:
When professionals are sued for errors in their services, such as:
An accountant making a mistake in tax filings that leads to penalties for the client.
A consultant being sued for providing incorrect advice that leads to the client’s financial loss.
Summary:-
D&O Insurance covers governance-related claims.
PI Insurance covers professional service-related claims.
Knowing your role - governance versus service delivery - helps determine which policy applies.
5. Can the Board of Directors or the Company Be Sued for Negligence by Staff in the Delivery of Professional Services, Even If the Board Isn’t Directly Involved?
Yes, both the company and its Board of Directors can be sued for negligence or mistakes made by the company's staff, even if the Board was not directly involved in the delivery of services.
Here’s how:
The Company can be held liable under vicarious liability, where the company is responsible for the actions of its employees acting within the scope of their employment.
The Board of Directors can also be sued for failure of oversight, such as failing to implement proper controls, which contributed to the negligence of staff. Although the Board wasn’t directly involved, poor management or lack of supervision could be grounds for claims.
In such cases:
D&O Insurance would be triggered if the lawsuit is based on the Board’s failure of oversight, mismanagement, or breach of fiduciary duty.
PI Insurance would cover the professional negligence of the staff or the company, but it does not protect the directors in governance-related matters.
Summary:
The company can be held liable for staff negligence.
The Board of Directors can be sued for failing in its oversight duties.
D&O Insurance covers claims related to governance, while PI Insurance covers the professionals involved in service delivery.
Conclusion:
Serving on a board of directors comes with significant responsibilities, and understanding your insurance coverage is key to protecting yourself. D&O Insurance is essential for governance-related claims, while PI Insurance protects professionals from errors in service delivery.
Always verify the scope of your coverage, especially when serving on multiple boards or in cases where the company or board could be held accountable for staff negligence.
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