Singapore law imposes stringent duties and responsibilities on directors and officers of Singapore companies. For example, under the Companies Act 1967 of Singapore, directors have fiduciary duties to act in good faith and in the best interests of the company.
Because of the requirement to comply with applicable laws, directors and officers of companies have significant duties and responsibilities, the breach of which can potentially lead to personal liabilities. These liabilities can arise from decisions made in the course of their duties, exposing them to legal actions from internal stakeholders, regulatory authorities, and third parties. To mitigate these risks, companies typically purchase directors and officers (D&O) liability insurance to protect their directors and officers. Based on market research, however, less than 50 per cent of private companies in Singapore purchase such policies.
Regardless of how competent, prudent and diligent a director or officer may be, there is still a risk that any business decision made on behalf of the company may result in losses for the company for which they may potentially be held accountable. This is because directors and officers face increased scrutiny and potential legal actions in the current complex business environment. Thus, the advantage of D&O insurance is that it provides additional comfort and assurance to the insured as a risk mitigation measure.
Our law firm works with insurance brokers to advise clients on the appropriate insurance policy to purchase based on their specific requirements.
If there are any suggestions or legal queries, please feel free to contact the author, Waltson Tan, at: waltson.tan@28falconlaw.com
D&O liability insurance are typically purchased by companies to protect the personal assets of directors and officers from claims which may arise from their performance of their regular corporate duties. These claims may arise due to wrongful acts, errors, omissions, breach of duty and mismanagement of company affairs.
The scope of coverage of D&O insurance differs across policies and insurers, but most of them would cover the following: (a) legal fees and expenses incurred in defending against claims; (b) payments made to settle claims out of court; and (c) payments made pursuant to court orders.
(a) Protect personal assets: Directors and officers may be held personally liable for regular business and operational decisions made on behalf of their companies. Typical D&O insurance covers the cost of defending against claims, which can include legal fees, court costs, and other legal expenses. Without D&O insurance, the personal assets of directors and officers may be jeopardised if faced with legal action. D&O insurance provides a financial safety net, ensuring that personal assets are protected to the extent of the coverage.
(b) Retain and attract talent: High-performing professionals are more likely to join and remain with a company which purchases D&O insurance for their personnel. This coverage provides them with the confidence to perform their regular duties with the comfort and assurance that they are protected against personal liability. This is particularly important in today’s litigious and complex business environment.
(c) Financially protect the insured company: In the absence of D&O insurance, companies may be required to indemnify their directors and officers out of the company’s funds. D&O insurance transfers such financial risks to the insurer and protects the company’s assets.
(d) Risk management and good corporate governance: As alluded to in the paragraph above, D&O insurance is an important component of a comprehensive risk management strategy. D&O insurance coverage does not only provide financial protection, but also demonstrates the company’s commitment to good corporate governance and risk mitigation.
(a) Insured persons: Group policies typically cover past, present, and future directors and officers of the insured company. More comprehensive policies may also cover legal representatives and even the company itself in certain circumstances.
(b) Claims-made basis: D&O insurance typically operate on a claims-made basis (i.e. claims which are made during the policy period are covered). Do note however that most of such policies have a retroactive date, which is a cut-off date prior to which there will be no coverage for the alleged wrongful act. It is thus crucial to maintain continuous coverage and avoid coverage gaps. Further, given that the retroactive date of a policy could potentially commence even before the inception of the policy, an experienced insurance broker would be able to advise companies on the best policy to purchase based on their circumstance.
(c) Side A, B, and C coverages: These coverages are usually done by way of three separate agreements. Side A covers directors and officers when the company does not or is prohibited from indemnify them. Side B coverage provides reimbursements to the company when it indemnifies directors and officers. Side C coverage (also known as entity coverage) protects the insured company in relation to legal claims made against the company.
(d) Extensions and endorsements: Policies can be enhanced to provide coverage for regulatory investigations, crisis management costs, and extradition costs. The availability of these options can be explained in detail by advisors and brokers when they are engaged.
(a) Breach of fiduciary duties: Claims may arise from allegations that directors and officers failed to act in good faith or in the best interests of the company or its shareholders.
(b) Mismanagement of company: Claims may be made for poor decision-making or negligence in managing the company’s affairs.
(c) Wrongful employment practices: Claims related to wrongful termination, discrimination, and harassment may be made by employees.
(d) Investigations on regulatory breaches: Regulatory authorities may investigate directors and officers for compliance breaches, which may result in significant legal costs and penalties.
(a) Understand policy coverage and exclusions: Be aware of the scope of coverage and exclusions in the policy to avoid unexpected gaps in coverage. Common exclusions include fraudulent and criminal acts.
(b) Review company policies regularly: Every insured company should review and update their D&O policy to ensure that it aligns with the company’s existing risk profile and changes to the regulatory landscape.
(c) Corporate training to build awareness: Insured companies should conduct regular training sessions for directors and officers to educate them about the scope of their duties and the protections offered under the D&O insurance coverage.
(d) Engage experienced brokers: Experienced insurance brokers can help companies to customise D&O policies which meet the specific needs of the company and its directors and officers.
D&O liability insurance is a useful tool to protect the personal assets of directors and officers, attract and retain top talent, and safeguard the insured company’s assets. Given the stringent regulatory environment and the increasing complexity of business operations in Singapore, having robust D&O insurance coverage is highly recommended.
Companies are encouraged to understand the policy coverage and exclusions, regularly review their D&O policies, and engage experienced insurance brokers for comprehensive protection. By doing so, companies and their directors and officers can navigate the challenges of corporate governance with confidence and security.
For further guidance on D&O liability insurance or any related queries, please feel free to contact the author, Waltson Tan, at: waltson@tjylaw.com.sg
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Our team frequently advises companies, directors and officers on the legal aspects of directors’ duties and liabilities.
The author, Waltson Tan, is a corporate lawyer trained in London and Singapore. He is qualified as an advocate and solicitor in Singapore, and has more than eight years of post-qualification experience.
Waltson focuses his practice on mergers and acquisitions, private equity, joint ventures, investment funds and other general corporate and commercial transactions. He has also represented numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Waltson also advises clients on a monthly and yearly retainer basis, where he provides dedicated services to each client in relation to the issues which clients face, including general corporate and employment related matters.
Prior to joining the firm, Waltson practised at some of the top law firms in Singapore and thereafter, at a leading international law firm, which was the second largest law firm in the United States and one of the ten largest in the world.
If you require further information and/or expert guidance on the above or any other area of law, you may wish to contact the author of the article, whose details are as follows:
Waltson Tan Director +65 8079 0028 waltson.tan@28falconlaw.com |
Office address: 101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358Singapore |