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Professional Indemnity or Directors and Officers Insurance?
There are a number of types of insurance product within the international market which are designed to protect companies, and their employees against claims of negligence and malpractice; Professional Indemnity Insurance and Directors and Officers Insurance are two prime examples of these policies.
A number of specialized industries will often purchase these insurance products as a routine matter of their daily operations; Medical Professionals, Lawyers and Solicitors, Accountants, Architects, and Management consultants would all be professions where the purchase of some form of professional liability insurance is considered.
Professional Indemnity Insurance
Professional Indemnity Insurance, also known as Professional Liability Insurance and Errors and Omissions Insurance, is a form of insurance coverage for professionals in certain industries and is designed to protect against a risk of malpractice or negligence.
To understand how Professional Indemnity Insurance works we can look at the two following examples:
1) Example 1: Architect Indemnity Insurance
An Architect designs a home for a client and oversees its constructions. However, shortly after completion a major flaw in the building's design is revealed which makes the structure unsound. This results in the demolition of the building, and the consequent reconstruction to rectify the flaw. No one is hurt, but the completion of the home is delayed and the buyer suffers a financial loss due to the re-building efforts; resulting in a compensation claim being filed against the architect.
A professional indemnity insurance policy would protect the arhcitect against the costs of a legal defense against the compensation claim, and cover the architect's liability towards the customer's financial loss.
2) Example 2: Medical Indemnity Insurance
A doctor is consulting a patient and misdiagnoses the condition the individual is suffering from. This results in a number of costly, and unnecessary tests being performed on the patient leading to a large financial loss for the individual. Additionally, the patient continues to suffer from the condition due to the misdiagnosis and consequently files a malpractice claim against the doctor.
A Professional Indemnity Insurance policy would normally cover the costs associated with the legal defense of the doctor, and the doctor's liability towards the customer’s financial losses resulting from the faulty diagnosis.
A Professional Indemnity insurance policy will provide coverage against a pure financial loss to the company - that is to say a loss where there was no damage to property or people. This type of coverage is normally only applicable in the event that the company is negligent in its business activities, and will normally be the result of a complaint (or claim) on behalf of one of the company's customers (rather than an external regulator or company stakeholder).
Directors and Officers Insurance
Directors and Officers insurance, also known as D&O Insurance is a form of professional indemnity cover. However, whilst a standard Professional Indemnity Insurance plan will normally provide coverage for the company as a whole, a Directors and Officers Insurance policy is designed to protect only a company's senior directors and officers against losses which have resulted from claims against those employees while they were acting in their official employment capacity.
The coverage of a Directors and Officers insurance plan is more in respect of the mismanagement of a company by its senior directors and executives. When a claim is made under this type of policy the claimant is normally a shareholder in the company, rather than a customer or external regulator.
D&O insurance policies will typically cover losses resulting from a wrongful act and will normally providing protection for:
- Damages, Judgements, Settlements, Bail Bond Costs, Crisis Costs, Deprivation of Asset Expenses, Prosecution costs, Public Relations Expenses and Reputation Protection Expenses.
- Legal Defense Costs
- Legal Representative Expenses
- Losses incurred within 30 days of buy-outs by management of a subsidiary company
- Costs arising from extradition proceedings
- Tax contributions where the company has become insolvent and there is personal liability of an insured
- Losses incurred for civil fines and civil penalties
- North American Exposures
- Actions between Directors of the company
A D&O Insurance plan can be obtained on a stand-alone basis, or it can be purchased as part of a business insurance package which includes the cover.
1) Example 1: Shareholder Complaints
Abuse of Position is claimed by a company shareholder against the organization’s directors. The shareholder is claiming that the directors have increased their annual salaries and, by doing so, have decreased the dividends due to the shareholders. The Shareholder brings a suit for repayment of the excessive salary against the company.
In this case a D&O insurance policy would cover the costs of investigating the lawsuit, as well as applicable legal fees, including any damages or settlements which may be awarded to the claimant shareholder.
Simple Differences Between The Coverage
Directors and Officers
Scope of Cover
The Whole Company
Only Directors and Officers
Typical Liability Concerned
Negligence, Errors and Ommisions
Choosing the Correct Option
Making a choice between Professional Indemnity or Directors and Officers insurance can be a tough decision - especially if you are a young company with limited funding. Ultimately, the choice of which policy is more applicable to your company will depend on the organization's operations and interactions.
If, for example, your company's core business is supplying advice to clients (like an Insurance Brokerage or Accountancy firm) then a Professional Indemnity insurance plan which covers you against the costs of defending claims resulting from negligent and wrongful information may be more suitable to your company than a Director's and Officer's insurance plan.
However, if your company is publicly listed and run for the benefit of a large number of shareholders then a D&O insurance plan which protects your senior employees against acts of mismanagement or wrongdoing whilst in their official employment capacity may be the better choice.
In some cases, and depending on the insurance market you are in, it may actually be possible to obtain a Business Insurance Package which includes both Professional Indemnity and Directors and Officers coverage, along with a range of general insurance benefits, giving your organization the widest scope of protection possible.
It is generally advisable to conduct a thorough review of all the applicable options within the insurance market you are located in and seek advice from a number of independent insurance intermediaries in order to ensure that you are able to access the best advice.