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D&O cover: directors and officers insurance explained

D&O (directors’ and officers’) insurance is often associated with larger companies, but it actually covers risks commonly run by SMEs.

If you run a small or medium-sized business, the chances are you have staff who don’t fit into neat little boxes, but have combined, dynamic roles. That’s part of the entrepreneurial spirit and the way small businesses grow fast and get rich quick.

But an entrepreneurial atmosphere can also leave SMEs vulnerable because often there isn’t the resource to ensure a systematic and comprehensive approach to compliance and risk management.

Anyone who owns a company or is in a managerial position is in real danger: a claim made against your actions could not only wreak havoc to your business, but also see your personal assets under threat. D&O cover can be invaluable in protecting SMEs.

A case in point: beauty turns ugly

Beauty therapist Anita Newman, who set up a salon with two friends is an informative example of how things can go unexpectedly wrong. The business was a roaring success and the team ended up taking on several employees within the space of a few months. The company’s reputation grew, and Anita and her partners were making a good return on their investment.

Then the problems started. One of Anita’s employees was a very difficult person, whose attitude resulted in several client complaints. The salon’s reputation started to suffer, and Anita and her partners made the reluctant decision to let the employee go.

The employee took her dismissal very badly. She claimed that it was unfair, and that Anita had always had a personal grudge against her. This was very distressing for Anita, who was exhausted from working overtime in the salon, as well as managing the accounts and other staffing issues.

Things went from bad to worse when, with the help of a ‘No Win No Fee’ lawyer, the ex-employee pressed charges for age discrimination. The claim was successfully upheld, and Anita had to sell her flat in order to meet the legal costs.

Had Anita and her clients had an HR department, these issues may not have arisen – but a growing business doesn’t have the luxury of dedicated professionals in every area, and is therefore very vulnerable.

Grey areas and cyber menaces

Hiring and firing isn’t the only weak point for SMEs. Managers and directors (or anyone acting in these roles, however temporarily) can also be held personally responsible for:

  • accidents that occur due to perceived negligence
  • shareholder losses
  • employee harassment or bullying

A growing concern for all business, but especially SMEs, who don’t tend to have dedicated IT teams, is the issue of data protection. Smaller businesses are attractive to cyber criminals because they generally hold more information valuable than individuals, without the resources to protect it.

Pete Fairly had a medium-sized manufacturing company specialising in alarm systems. As the business grew, he was storing more and more client information on file, including names, addresses, and even bank account details. Because the data was password-protected, Pete assumed it was safe.

Over the Christmas holidays, cyber hackers cracked Pete’s files and sold the sensitive information to third parties, who then managed to swindle some of Pete’s clients out of significant sums of money – in his name. Pete found his personal assets under threat as he battled to meet the legal costs.

Again, a dedicated IT team might have prevented this unfortunate chain of events. But it was financially unviable for Pete to employ a whole department, as is the case for most small and medium-sized businesses.

The sad fact is that SMEs are attractive to criminals because they’re big enough to have significant revenue and client data, while small enough to lack protection.

D&O insurance is designed to cover this gap and help owners and directors of small and medium-sized businesses to feel secure enough to make decisions with the entrepreneurial flair they need to get ahead.


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