Article constantly updated
In the event of an error, company directors run the risk of paying out of their own pocket for damages suffered by the company they work for.
GDPR sanctions, cyber-attacks, environmental pollution, accidents in the workplace: here is a list of the most important insurance solutions to protect the personal assets of managers.
European legislation regarding the liability of administrators applies to all of the following roles:
- sole administrator,
- plant managers/country managers of branches, including foreign branches,
- auditors,
- general managers.
There are two types of risk they face, financial and legal, as follows:
- financial: we are forced to reimburse the damage suffered, let’s say, by one of our suppliers, or by an employee who sues us
- legal: we have to pay the court costs out of our own pocket to defend ourselves
Third parties who can take legal action against the manager are both inside and outside the company.
On the one hand, the company owners, employees, shareholders and partners.
On the other hand, customers, suppliers, banks, investors, public administration, the State, consumer associations, etc.
Some specific cases.
Year after year, the list of cases in which the manager can pay damages out of his own pocket is growing.
In this article I have listed 8 real cases, which I present here for your convenience:
- Violation of workplace safety regulations,
- workplace accident,
- environmental damage,
- use of company credit card for personal reasons,
- damage to consumer from contaminated product,
- discrimination at work,
- damage from unauthorised vehicle circulation,
- cybercrime/GDPR violation, smart working
With reference to point 1., if an employee dies as a result of an accident in the company, the director can be held liable in criminal proceedings.
- smart working
To be clear, if an employee were to die as a result of an accident at the company, the director could be subject to criminal proceedings, and the same would apply if toxic liquids were to pollute the areas surrounding the production site.
There is specific insurance against this and other equally serious risks. Let’s take a look at them together.
‘Directors and Officers’ (D&O): what does the director’s civil liability policy cover?
Within the European Union there are international insurance companies that have solid experience in this field. Companies can therefore count on:
– maximum compensation limits of several hundred thousand/millions of euros.
– insurance coverage updated to the new risks in the company. Recent policy texts have included both the new cyber risk and violation of GDPR regulations.
Here is a list of the most important insured expenses.
1. Damage to third parties due to environmental pollution.
Let’s take the example of company Alpha and its managers who are guilty of an environmental crime. Whoever has suffered damage (the production plant or the neighbouring farm, a public body for the protection of the territory, etc.), may request compensation from the company. Now, Alfa’s owners can hold its managers responsible, if declared guilty, for the reimbursement of all expenses.
Purchasing a civil liability policy for administrators that includes environmental damage is an important solution: it allows the management to have an adequate ceiling to cover the legal expenses for their defence in court.
However, when we talk about damage to the environment, we must clarify that damage caused by accidental pollution is one thing.
The personal financial consequences that a manager may face for not having taken all appropriate measures to avoid damage to the environment are another.
The former can be covered by a specific policy against this risk (Environmental Liability Insurance).
The second, by the Director’s Liability policy.
Therefore, we advise companies to check if they are covered against these two very different risks.
2. Legal expenses.
We have just seen this in the example above. One of the most important advantages of this policy is the payment of legal expenses. The insurer bears the cost of the defence team.
Usually, the lawyer who defends the insured is chosen by the insurer. However, some leading companies allow their policyholders, in case of absolute necessity, to choose their own lawyer.
The cost of the time spent by the insured in court, together with travel expenses in case of a hearing abroad, is included in the policy.
3. Fines and sanctions: GDPR.
Much has been written about the sanctions, including criminal ones – which companies face for violating the obligations imposed to protect the privacy of consumers – General Data Protection Regulation (GDPR) –. Article 83 of the European Regulation exposes companies to the payment of very high fines.
Well, the texts of the new policies protecting the administrator have been updated precisely to protect managers from the risk of paying these sanctions out of their own pockets.
In the event that the company’s owners or a third party should call the administrator to answer jointly and severally for damages due to failure to comply with these legal obligations, the policy offers a specific solution to this case.
4. Communication expenses.
With this coverage, the insurance policy provides a substantial sum of money for communication expenses to protect the brand of the company, both on the web and in print.
Let’s consider the case of environmental damage, mentioned above. Or the serious damage to a company’s image that can result from alleged discrimination against an employee.
Bad reputation and publicity for those who claim to have rights against their employer can be very costly.
5. Damage from cyber attacks.
In recent years, numerous top managers of important American and European companies have been removed because of the heavy losses suffered from cyber attacks.
This is precisely one of the most important new features offered by current Director protection coverage: insurance against cyber risk.
Therefore, if due to a cyber attack the company wants to hold the manager responsible for the damages suffered, the Director Liability policy represents an effective solution.
We advise directors to verify:
a) if the company is insured,
b) if the policy ‘D&O’ also covers cyber risk.
On-site experts for tailor-made solutions.
In this article we have taken a general look at some of the most important and recent solutions offered by company director insurance policies, at European level.
However, companies that are already established abroad, or that intend to invest in foreign markets, should make sure they are fully informed about local legislation regarding company director liability insurance.
Considering that each country has its own specific regulations, it is advisable to always contact experts on your country of residence, who will be qualified to find the most suitable local insurance coverage against all those risks that are little known or completely ignored.