D&O insurance – directors' and officers' liability

D&O insurance protects you personally when someone claims damages from you for a decision you made as managing director or board member. If the claim is covered, it pays for lawyers and investigation, and for the damages if you are found liable. It can matter even in a small limited company, because the protection a limited company gives the owner's private finances does not extend to personal liability for damages. In Swedish it is called VD- och styrelseansvarsförsäkring.

How D&O insurance works

1. Someone makes a claim against you. The claim is against you as a person, not the company. It can come from a bankruptcy trustee, a co-owner, a lender or a supplier.
2. You report the claim. Do it as soon as you know about it, and before you respond on the substance.
3. The insurance pays for your defence. Lawyers' fees are usually paid as the dispute goes on, not only once it is settled.
4. The claim is decided. If you are found liable, the insurance pays the damages, up to the insured amount. If the claim is rejected, the insurance has still paid for your defence.

The company takes out the policy, but it covers the people in management: the managing director, board members and often deputy board members and other senior managers. Like professional indemnity, it usually covers claims made while the policy is in force.

The owner who is also MD and board

In many small limited companies, the same person is the owner, the managing director and the only board member. It can look as if nobody could ever claim anything from you. But if the company goes bankrupt, a trustee takes over and reviews the decisions made before the bankruptcy. If the trustee judges that you harmed the company through a careless decision, the bankruptcy estate can claim damages from you personally.

The same applies when you bring in a co-owner, an investor or a loan. Then there are people outside the management with an interest in how the company is run.

What it covers

Damages

Compensation to whoever suffered the loss, when you are liable for a decision made in your role. It could be a deal made on poor terms, for example, or a contract that broke the company's articles of association.

Defence costs

Lawyers and court proceedings, both when the claim holds up and when it does not. This is often the part that gets used most.

Investigation costs

Legal help when an authority investigates how the management has acted, to the extent the policy terms include it.

Example: The order that was never paid. A limited company with two co-owners sells a large order on credit to a new customer without checking the customer's finances. The customer never pays, and six months later the company goes bankrupt. The trustee argues that the board was negligent and claims damages from both board members personally. The insurance pays their lawyers while the dispute goes on. If the court finds them liable, it also pays the damages up to the insured amount.

What is not usually covered

• Fines and penalties. They cannot be insured.
• Crimes and deliberate harm. Anyone who knowingly harms the company or someone else is not protected.
• Personal liability for the company's debts and taxes, for example when a kontrollbalansräkning, the balance sheet Swedish law requires when equity runs low, was not drawn up in time, or when the Swedish Tax Agency pursues the company's representative personally. This is often excluded or limited.
• Claims you knew about before the policy started.

Exactly what applies is set out in the policy terms and in the company's försäkringsbrev (the policy document).

Who needs D&O insurance?

It can make sense for limited companies with outside co-owners or investors, companies with loans or credit, companies with an external board member, and companies that are growing fast or buying and selling businesses. Housing cooperatives and non-profit associations also have boards that carry liability.

An experienced external board member will often ask about the insurance before accepting the role. That applies in smaller companies too, for example in consulting and IT, where the board decides on large client contracts and liabilities.

How much does it cost?

The premium mainly depends on:

• the company's size and turnover,
• its financial position, such as equity ratio and profitability,
• which industry it is in,
• the ownership structure, and whether it has outside owners or is listed,
• the insured amount and the deductible.

There is more on what affects the price of a company's insurance in the guide what does business insurance cost.

Frequently asked questions

Is D&O included in business insurance?

Usually not. It is an add-on or a separate policy. Combined business insurance includes liability insurance for the company, not for the people in management. The guide on what business insurance includes goes through the usual add-ons.

Do I need it if I own the whole company myself?

The risk is smaller, but it exists. If the company goes bankrupt, the trustee can claim damages from you for decisions you made, and lenders or suppliers can do so if a decision broke aktiebolagslagen, the Swedish Companies Act.

Does the insurance still apply after I leave the board?

Usually yes, for decisions you made while you were on it, as long as the company still has the policy when the claim arrives. Check what the policy terms say about former board members.