The Importance of Outside Directorship Insurance Coverage within a Professional Indemnity Policy


November 2023

The Importance of Outside Directorship Insurance Coverage within a Professional Indemnity Policy

Professional indemnity insurance is a crucial risk management tool for businesses and professionals, protecting them against claims and lawsuits arising from errors, malpractice, or negligence in their professional services. While such policies typically focus on insuring the individual or firm, including comprehensive coverage for their services, when these services include the provision of individuals or corporate entities acting as directors for client entities, an outside directorship liability provision should be included.

Understanding Outside Directorship Liability Insurance

Outside directorship liability (‘ODL’) coverage is more commonly associated with directors’ & officers’ insurance and is designed to protect individuals who serve as directors or officers on the boards of external companies. Where these appointments are provided as a professional service, the contractual terms, indemnification provisions, and the basis of these appointments will necessitate the transfer of the ODL provision under a professional indemnity policy.

An outside director assumes significant responsibilities and will make critical decisions that impact the third-party company and its stakeholders on a daily basis. These positions also come with inherent risks, including the possibility of being held personally liable for actions or omissions while performing duties.

By including this coverage within a professional indemnity policy, professionals can effectively manage the risks associated with serving on external boards as part of their professional services.

Importance of Outside Directorship Insurance Coverage

1. Personal Asset Protection: Serving on external boards exposes professionals to potential personal liability for wrongful acts or errors in judgment. With outside directorship insurance, individuals can shield their personal assets, ensuring financial security in case a claim arises. Such coverage extends beyond the professional realm into their role as a director or officer on another company’s board.

2. Enhancing Board Service: Insurance coverage for outside directorship responsibilities can encourage professionals to actively participate on external boards. They feel more secure knowing they have financial protection in place, allowing them to make decisions and provide valuable insights without the fear of personal liability. This assurance encourages talented professionals to take on such roles, which ultimately enhances board composition and improves corporate governance.

3. Comprehensive Risk Management: Including outside directorship insurance within a professional indemnity policy contemplates coverage being available against claims that may arise from their services as directors or officers on external boards.

4. Mitigating Potential Legal Costs: In the event of a claim, legal expenses can quickly accumulate, even if the defence is successful. Outside directorship coverage helps cover the costs associated with legal defence, settlements, or judgments, reducing the financial burden on the individual or firm contracted to provide the outside director services.

Jumbo Directorships / Multiple Appointments

It is not un-common for one individual to act as a director or officer on multitude client companies or funds. Firms should be aware of the number of positions held by any one individual to address any concerns raised on suitable time and effort being provided to each client. This has been a recurring question that insurers request from our clients who provide these types of services.

Selective Positions

When reviewing the appointment of a director or officer to a third-party entity, it is important that consideration is given to the type of client, its sector, and how it has been managed. As an example, insurers have greater concerns on providing outside directorship coverage where the client entity is engaged in CTA’s, Digital Assets, controversial ESG practices such as fossil fuels or mining.

It is crucial to discuss specific coverage details and policy terms with insurance providers with expertise in this sector to maximize the benefits of this important risk management solution.

As a professional firm or individual, it is key to understand the importance of protecting yourself and your business against claims arising from errors, omissions, or failures in the provision of your services.

At Bishopsgate, we have the expertise in this sector, and are available to discuss any questions or needs you have.