Liability insurance arises as a result of moral hazard. MORAL HAZARD is the risk arising from the character or circumstances of the policyholder or his employees. Also, it is important to know the following: the history of liability insurance, who is a D&O in an Institution and the various types, what the D&O policy covers and what it excludes, and finally the importance of this insurance cover to us and our businesses.

1. DIRECTORS AND OFFICERS
LIABILITY POLICY (D&O)
Who Needs this policy, And Why?
Every institution has a manager that could be attributed to the title of director or an officer
commonly known as D&O this physical person(s) is in charge of the running of a legal
person (the institute). Before coming up with the special insurance cover, D&O actions and
omissions were attributed to the institution they represent since they are considered
representatives of the institution. This is because in law a representative of an institution’s
actions and omissions are the deem to be the actions of the institution itself. In the course of
commercial history, D&O committed acts or omissions (liabilities), affecting third parties
negatively thereby breaching the ‘Neighbor principle’. D&O usually hit themselves under the
armpit of their institution, which in turn causes the institutions huge sums of money through
liability claims. In law there is a maxim that states “Justice can not suffer a wrong without a
remedy”, this is why there is the need to hold the D&O responsible for their deeds through
the establishment of this policy.
Brief History of Liability Insurance

2. This insurance policy is a pretty new business in the insurance industry as it was first
marketed in the 1930s by Lloyd's. In the 1980s, the United States experienced a "D&O crisis"
along with the overall liability crisis, with increased premiums, reduced availability, and
numerous additional exclusionary clauses in the insurance policy. Due to changes in
securities laws in the 1960s, the insurance was sold primarily based on the concerns of
directors & officers of "personal financial protection", (26, October 2020). In Wikipedia.
Similarly, the Directors and Officers (D&O) Liability is relatively new to the UK market.
Directors are PERSONALLY LIABLE and the Companies Act (1985) prohibits companies
from indemnifying directors for their liabilities except for costs incurred by him in the
defense of a claim. The popularity of D&O cover has increased during the last thirty years
due to a dramatic rise in claims by shareholders against directors. Recent examples include
Enron and Northern Rock and these highlights the extent of liabilities of directors and the
benefits of D&O Insurance, (MITC, 2017)
Who is a Director or Officer in an Institution
"Directors and officers" are generally defined as persons who were, now are, or shall be
directors and/or officers of the company including estates, heirs, and legal representatives or
assigns of directors and/or officers in the event of their death, incompetency,
insolvency or bankruptcy, (Greenberg & Dean, 1975).
Types of Directors and Officers
-A de jure director​, that is one who has been validly appointed to the office;
-A de facto director ​is one who claims to act and purports to act as a director although not
validly appointed as such; and
-A shadow director,​ by contrast, does not claim or purport to act as a director. He lurks in the
shadows sheltering behind others who, he claims, are the only directors of the company to the
exclusion of himself. Usually excludes his/herself as a director but his/her opinion plays a
great role in decision making in the institution.
Question: You as a director or officer where do you belong?
What Does D&O’s Policy Cover and What It Excludes
The question that may pop up in our mind is what can give rise to the liability of a D&O, or
what does this policy type cover?. It is very straightforward aspects such as negligent advice
or misstatement, acting ‘ultra vires’ (beyond the powers), failing to disclose the full extent of
the director’s interests, errors of judgment, negligent supervision of delegated authority,
imprudent investments, excessive borrowing, failure to arrange proper insurance, (MITC,
2017). The Enron Financial scandal case of 2001 is a good example that can be used to
exemplify.

3. Nonetheless, the D&O liability insurance policy does not cover all acts and omissions of the
D&O. The exclusions are covered by tailored insurance cover for example the exclusion for,
fraud and dishonesty are covered by a fidelity guarantee insurance policy. Other exclusions
include; improper personal gain, insured v insured, pollution, outside directorships, bodily
injury or damage to tangible property, computer date recognition, deliberate acts, fines &
penalties, claims brought outside a recognized jurisdiction, (MITC, 2017).
Why is this policy important
Directors and Officers (D&O) Liability insurance is aimed at protecting the directors and
officers of a company, trust, organization, etc against their liability for financial loss suffered
by third parties. Whilst a company’s liability may be limited, the personal liability of a
director for their wrongful acts is not. This is because, in acting as the company’s ‘mind and
will’, the directors may incur a common law personal liability for the wrong done by the
company, (MITC, 2017).
Directors and officers are sued for a variety of reasons related to their company roles: There
are several reasons brought forth by Business owner's Playbook, (n.d.), to justify why D&O’s
of institutions need liability cover. D&Os may find themselves in one or more of the
situations: Breach of fiduciary duty resulting in financial losses or bankruptcy,
Misrepresentation of company assets, Misuse of company funds, Fraud, Failure to comply
with workplace laws, Theft of intellectual property, and poaching of competitor’s customers,
lack of corporate governance.
Take Away
Liability insurance arises as a result of moral hazard. MORAL HAZARD is the risk arising
from the character or circumstances of the policyholder or his employees. Also, it is
important to know the following: the history of liability insurance, who is a D&O in an
Institution and the various types, what the D&O policy covers and what it excludes, and
finally the importance of this insurance cover to us and our businesses.
Newton Bezeng
Founder BeNew Insurance
Email: newtonbezeng@outlook.com
Website: https://benew.business.site
Blog: benewinsurance.blogspot.com
Facebook: https://web.facebook.com/BeNewcholo
LinkedIn: https://www.linkedin.com/in/newton-bezeng-llb-mba-165a5336/
Twitter: @newtonbezeng

4. References
-Business owner's Playbook, (n.d.). The Who, What & Why of Directors & Officers
Insurance.
https://www.thehartford.com/management-liability-insurance/d-o-liability-insurance/explaine
d
-Directors and officers liability insurance. (26, October 2020). In Wikipedia.
https://en.wikipedia.org/wiki/Directors_and_officers_liability_insurance
-Greenberg, M. J. & Dean, D. B., (1975) Corporation and Security Law: Protecting the
Corporate Executive: Director and Officer Liability Insurance. Marquette Law Review.
https://core.ac.uk/download/pdf/148689924.pdf
-Malta Insurance Training Center (MITC), (2017). Liability Insurance for Commercial
Enterprises. Module 4 coursebook.