In terms of the Financial Advisory and Intermediary Services Act of 2002 (FAIS Act), professional indemnity (PI) cover is mandatory for all financial service providers (FSPs). Directors and officers (D&O) cover isn’t required by law, however having it in place can go a long way in helping an FSP mitigate risk.
PI cover protects FSPs against claims from third parties for damages and legal costs which may arise out of an act, omission, or breach of professional duty in the course of the business. In most cases, PI claims result from the incorrect professional advice given to policy holders by FSPs.
D&O cover, on the other hand, protects directors, officers, prescribed officers, and employees acting in a managerial or supervisory capacity against any potential liability arising from decisions and actions they take within the scope of their official duties (e.g. their fiduciary duties such as a duty not to exceed their powers, a duty to avoid conflict of interests, etc).
Why do you need D&O cover if your company will hire attorneys to defend you?
The company may or may not be able to indemnify its directors and officers depending on the provisions of its memorandum of incorporation (MOI). Further, there is no assurance that the business will shoulder the significant financial burden associated with the defence costs in drawn-out legal proceedings or if damages are awarded in favour of the claimant as well as their legal costs. In addition, the company might not have the financial means to indemnify the directors and officers in the event of a claim.
D&O cover aims to protect the personal assets of the directors and officers, as well as that of the company itself. The cover also reimburses the company if the company indemnified its directors and officers.
D&O cover policies differ from insurer to insurer, but in general, it should cover investigation costs, own legal costs, settlement costs and/or adverse judgment cost awards. Other common risks that are covered include failure to comply with regulations, breach of fiduciary duties, competitor claims, creditor claims, employment practices and HR issues, and reporting errors. Standard exclusions to the D&O policy are claims arising out of professional indemnity and misconduct, such as dishonesty, fraud, illegal profits or gains, and deliberate acts.
FSPs need a risk management plan to comply with regulations and it is advisable that D&O cover is considered as risk mitigation against claims from stakeholders based on alleged breach of duties.