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20 July 2022

Directors, Officers, and Shareholders Insurance

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Organizations building an insurance portfolio often overlook the risks presented to the company by directors, officers, and shareholders. Senior employees, including C-level executives and directors, can erroneously view themselves as insulated from many of the mishaps that may concern ground level workers.

In many cases, the only relevance senior employees have on a company’s insurance coverage will be their satisfaction (or lack thereof) with the business’ employee benefits and health insurance offering.

However, this does not take into consideration the fact that no matter a person’s seniority in a company that individual is still only human. They are prone to making the same mistakes as other employees, and suffering the same accidents as other workers – even if their impact on the company is more visible and more widely distributed.

A number of Hong Kong business insurance products exist to help companies manage the risks presented by senior employees and critical staff members. In the case of SMEs, these insurance offerings can even assist with repurchasing the shares of a deceased shareholder - keeping business interests within the business.

Negligence, Malfeasance, and Breach

Negligence, Malfeasance, and Breach.

These three words strike terror in the heart of any executive who hears them, because even in the most frivolous of claims, they often mean that things are about to get extremely expensive. From a manager embezzling corporate funds, to an employee providing free marketing to a competitor, all businesses have exposure to costly perils which can come from both internal and external sources.

Negligence and Misrepresentation

When employees mess up and their work is full of errors and omissions, causing a customer or other third party to experience a loss, that individual or entity is entitled to seek compensation from the business at fault.

The form of insurance protection for this eventuality is Professional Indemnity Cover.

When a company doesn’t perform up to its advertised standards, or when an employee has failed to properly care for a client, then Professional Indemnity Insurance will provide coverage for the legal costs of fighting that claim, in addition to any judgements which are not in favor of the business.

While senior employees are protected under a company’s professional indemnity insurance plan, this type of protection really exists to protect the business (and consequently, the employee) from Negligence, Misrepresentation, and Intellectual Property Claims brought forth by third parties.

Director’s & Officers Coverage

What happens if a company faces a claim that they discriminate when hiring staff?

This is not a claim of negligence, or misrepresentation. Rather, this is a claim that a responsible officer (or officers) within the company is breaking the law – or at least failing to operate under relevant regulations and adequate corporate governance.

Directors and Officers Insurance financially protects both the company and senior directors and officers from lawsuits alleging “wrongful acts.” The D&O insurance policy covers legal defense and judgement costs in the event that a director is found to have acted “wrongfully.”

D&O protection is different from Professional Indemnity coverage in that it deals with claims that arise from third parties as well as those which come from within a company. If a manager is having a hard time paying employees on the correct date, they are in breach of their fiduciary duty and consequently the company is in breach of its fiduciary duty.

Similarly, if directors are organizing expensive trips, or expensing unauthorized businesses to their corporate accounts, a case could be made for misuse of corporate funds, exposing the company to employee action, shareholder action, legal action, or even all three!

Director’s and Officers insurance is a critical component in most business insurance portfolios, and can be invaluable in the case that a company needs to fight a claim of wrongdoing by a senior member of staff.

Insurance for Continuing after a Personnel Loss

One of the most commonly forgotten issues for small business and startups is the concern of continuity – especially if the need for continuity planning comes unexpectedly.

If the founder of a young startup company was to be hit by a bus in Mong Kok one morning, their absence would likely necessitate the cessation of operations by the business. This is true for a CEO at a more established SME, or a long-term employee in a critical function like IT or Marketing; how would your organization cope if the institutional knowledge you depended on suddenly disappeared?

In the case of smaller or younger companies, that key employee in (addition to being the person to know where the passwords were stored) was probably a shareholder. Their sudden absence following an unexpected death can cause a number of additional problems.

Key Person Life Insurance

In the event that a key employee dies unexpectedly, any organization is going to be thrown into immediate disarray. For an employee like the CEO, Founder, or Managing Partner to pass away means that a company is going to have to recover that individual’s operational capabilities.

Unfortunately, there is no way to replace a person. However, through a Key Person Life insurance policy, a company can ensure that they are able to access critical funds to continue operations in traumatic and stressful circumstances. The smaller a company and the more senior an employee, the greater the impact of the loss. This is especially true of startup companies, or small businesses with 2 or 3 employees on the books.

Having access to the funds needed to suspend operations and reassess the business, without worrying about having to generate revenue can be critical. This is also true of having the financial resources available to look into having human resources search and find new staff who can supplement the offering of the lost employee. Having a key person life insurance policy gives a business option when it comes to dealing with the unexpected death of someone important to the organization, and allows the company to make future decisions in light of its new reality.

Shareholder Protection Insurance

Shareholder Protection Insurance is similar to Key Person Life Insurance, but as the name suggests this form of business coverage related mainly to shareholding.

Should a company shareholder die, Shareholder’s Protection Insurance allows the business to repurchase that individual’s shares from their family, or whichever entity inherited them upon the shareholder’s death. This can be important for a small business or startup, especially those concerned about the impact of the inheritor on the business.

Shareholder Protection Insurance is, essentially, a contract between shareholders that should they die, their shares will be eligible for purchase by the company. The insurance policy provides the funds for that purchase, without the business having to dip into its own finances. The family, or inheritor of the deceased individual receives the sale price of those shares, and money to assist with their standard of living or debt payments.

This type of policy ensures that business concerns stay within the business and can be invaluable for small companies where the management team is uncomfortable with the idea of family members participating in major business decisions.

Free Hong Kong Business Insurance Consultation

CCW Global’s expert Hong Kong Insurance brokers can help businesses across Asia overcome all of the most common obstacles they face. From Employment Insurance Laws, to products which are designed to enable efficient continuity of operations, we have access to the most comprehensive Corporate Business Insurance offerings in Hong Kong.

For a free, no-risk, no-obligation quotation, please Contact Us today to arrange a consultation with an expert insurance broker on the products which may be right for your company.

About Author

Michael Lamb is an insurance industry professional with many years of experience within the Hong Kong Insurance market. Focusing on APAC coverage issues, Michael is able to provide extensive analysis and insight to a range of pressing topics. Previously, Michael provided insurance broker Globalsurance.com with their most highly valued articles and was a key influence in the development of all the content on Pacificprime.com, Michael has a passion for insurance matched by few others in the region.

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