The manner in which directors of companies, incorporated in England Wales, perform their functions and the circumstances in which they discharge their duties vary from company to company. All directors, however, owe a range of duties and, in the increasingly regulated business environment in which companies operate, the case for purchasing Directors and Officers (D&O) liability insurance is compelling.

In its basic form, D&O liability insurance indemnifies directors in respect of liability to third parties arising out of wrongful acts. The cover affords directors the security of knowing that their personal assets are not in the frontline if claims are made arising out of a director’s acts or omissions in his/her capacity as director.

In a well-drafted policy, what constitutes the wrongful act is clearly and widely defined to include the many ways in which a director can incur liability to third parties. In most policies the cover extends to include an indemnity in respect of losses that might involve allegations of dishonesty or fraud, unless that conduct can be proved.

Equally valuable however is the indemnity given by D&O policies in respect of defence and investigative costs. Directors must discharge a myriad of complex duties, breach of which can leave them open to both civil and criminal investigations and penalties. For example, in the event that there is a serious safety incident in the workplace, individual directors are potentially criminally liable in their personal capacity. If it is alleged that a director did or failed to do something that led to the incident, a prosecution under the Health and Safety at Work Act 1974 may well follow. If the incident has led to a fatality, directors risk being charged with gross negligence manslaughter. Either type of prosecution can lead to directors being fined or imprisoned.

Criminal penalties and sanctions are in themselves uninsurable for reasons of public policy. However, the legal costs incurred by directors in dealing with investigations and prosecutions – which can be substantial - can be insured against. If more than one board member is involved in a criminal investigation or an inquiry, each director is likely to need separate legal representation. It would not be unusual for investigations in fatality cases to take in excess of two years and complex criminal prosecutions a similar length of time. In the high-profile fatality case of R v. Chargot Limited, which went through a lengthy appeals process, a director was given a personal fine of £75,000 and a costs order of £103,000 in respect of the prosecution costs. This was in addition to fines and costs orders made against the employer company. The level of the fine and the costs order imposed is however likely to have been a small proportion of the legal and other costs incurred by the director in the course of the investigation. The costs involved in dealing with lengthy investigations of this nature, and in defending a prosecution - especially where there are complex technical issues in dispute that necessitate extensive technical expert evidence - can run to many hundreds of thousands of pounds.

Some D&O policies will also indemnify in respect of civil fines, legal costs of defending disqualification proceedings and bail bond expenses where a director is required by a court to pay bail or an equivalent bond. Once again, the frequency of these investigations, and the level of fines imposed are generally considered to be on the increase. For example, in the sphere of competition law, the European Commission imposed total fines amounting to €3.4 billion between 2000 and 2004. During the course of 2010 alone, fines of more than €3 billion were levied. While these fines are aimed at the company, the role the directors played in the anti-competitive activity is also scrutinised. The OFT recently signalled its intention to make greater use of director disqualification orders where it uncovers evidence that a director was responsible for, or ought to have known of, competition law breaches at a company.

The stress involved in dealing with investigations and in defending prosecutions of this nature is considerable enough. Having to worry about finding the funds to meet the legal costs will only add to the burden.