Who Can Make a Claim Against a Company Director?

Company directors carry important responsibilities. They are trusted to make decisions that affect the success and future of the business. These decisions must be made with care and honesty, keeping in mind the interests of the company and its stakeholders. But even the most careful directors can face complaints or claims against them.

Legal claims can happen for many reasons. Sometimes, they are the result of mistakes, while other times, they may come from actions that others see as careless or dishonest. These claims can come from inside the company or from outside individuals and groups. In serious cases, a director might even face personal legal action.

This is why many businesses choose to protect their directors with a type of cover called directors' and officers' liability insurance. Also known as D&O insurance, this policy helps defend directors if they face legal trouble related to their duties.

This article looks at who can make a claim against a director, what those claims might involve, and how D&O insurance plays a key role in reducing risks.

The Most Common Sources of Claims Against Directors

Directors must follow the law, stick to their duties, and act in good faith. If they do not, they can face legal action. These claims come from many different sources, including within the company and outside of it. Below are the most common sources of such claims.

Employees

Claims from employees are one of the most regular issues that directors face. These usually happen when workers feel they have been treated unfairly. Common complaints include being unfairly dismissed, discriminated against, bullied, or harassed. Even if a director did not personally carry out the action, they may still be named in the legal claim due to their leadership role.

Sometimes, employees report problems within the company that go ignored. If a director is aware of these concerns and fails to act, they may also be held responsible for that failure. This can lead to further legal consequences, especially if the issue causes harm to staff or the company.

Regulators

Government agencies and regulators often keep an eye on companies to ensure they follow the law. If the business fails to meet legal standards, such as health and safety rules or data protection laws, a director could be held personally responsible. This is because they are seen as being in control of the company’s operations.

Regulators may issue fines, penalties, or even bring a legal case against the director. In some cases, directors may face disqualification from managing companies in the future. D&O insurance can provide help by covering legal fees and other costs linked to these claims.

Shareholders

Shareholders expect directors to act in the best interests of the company. If they feel that a director’s actions have caused harm or financial loss, they may decide to take legal action. This might happen when directors make poor business choices, hide information, or act without proper care.

These types of claims are more likely in larger companies where shareholders have invested significant amounts of money. A drop in the value of the business due to a director’s mistake can lead to strong legal action. In these cases, D&O insurance can be vital in protecting the personal finances of directors.

Claims From Within the Business Itself

Sometimes, legal claims against directors come from inside the business rather than from outside sources. These can be particularly difficult to manage, especially when they involve colleagues or other senior staff members. The following examples are common types of internal claims.

A director might be accused by another director or manager of not acting in the company’s best interest. This could include signing risky deals, not following company policy, or failing to inform others of a conflict of interest. Even when there is no intent to cause harm, such actions may still lead to claims.

Businesses themselves can also bring claims against directors. For instance, if a director’s choices result in financial loss or damage to the business’s reputation, the company may take legal action to recover the loss. This could happen if a director breaks the rules set out in their contract or acts outside their powers.

D&O insurance helps protect directors in these cases. It covers legal costs and settlements and can even provide support for claims that arise after a director has left the company. This offers peace of mind and a sense of security to those serving in these important roles.

When Third Parties Can Hold Directors Personally Responsible

Third parties, such as suppliers, customers, and members of the public, can also bring claims against company directors. These claims usually relate to how a business has behaved and whether the director has played a part in any wrongdoing. If found responsible, directors may face personal legal action.

For example, if a company fails to pay its debts, creditors might try to hold directors personally accountable. This often happens in cases where directors continue trading even when they know the company is struggling financially. This is known as wrongful trading, and it can lead to serious consequences for those involved.

Customers might also file claims if they feel that they were misled by the company or harmed by its products or services. If the director is believed to have ignored warnings or failed to act on known problems, they could be named in the legal claim.

Suppliers may claim that a director allowed a contract to be signed knowing the business could not meet its side of the deal. In these situations, directors may be seen as having acted dishonestly or recklessly, which increases the chances of personal liability.

In some cases, members of the public or community groups can also bring claims. This might occur if a company causes harm to the environment, public health, or safety. Directors who fail to prevent or respond to these risks can be targeted directly by those affected.

How D&O Insurance Helps Manage These Risks

With so many potential sources of legal action, it is clear why D&O insurance is such an important safety net for company directors. This type of insurance plays a key role in helping individuals manage risk and protect their financial wellbeing.

Cover for Legal Defence

Legal cases are often expensive and time-consuming. One of the major benefits of D&O insurance is that it covers the cost of defending a legal claim. This includes paying for lawyers, court fees, and expert witnesses. These costs can grow quickly, even if the director is later found not guilty.

With insurance in place, directors can face legal challenges with confidence, knowing they have the right resources to support them. It also allows them to focus on running the business without the added worry of personal legal bills.

Support for Settlements and Penalties

If a director is found to have made a mistake or acted in the wrong way, they may need to pay damages or a settlement. D&O insurance can help with these payments, depending on the type of claim and the policy cover. This protects the personal assets of the director, including their home and savings.

In addition, some policies also help cover regulatory fines and penalties, where allowed by law. This kind of support can be vital in helping directors recover from a difficult situation.

Long-Term Peace of Mind

D&O insurance not only protects current directors, but it can also offer what is known as run-off cover. This means claims made after a director has left the business can still be covered. This is useful for retired directors or those moving to new roles.

Having this insurance in place shows a company is serious about risk management. It also helps attract skilled and responsible directors who know they will be supported if legal problems arise. Overall, D&O insurance is a smart way to give directors the peace of mind they need to lead effectively.