Protect yourself with the appropriate insurance for business leaders
For many, becoming a senior executive or director in a business is the epitome of a successful career. With this authority, however, also comes a great deal of responsibility, which is why having the right insurance is vital. 

By law, directors of companies are obliged to fulfil certain duties.
According to the Companies Act, 71 of 2008, the directors and executives of a company have certain duties to fulfil, also known as fiduciary duties. Section 76 of the Act states that directors must exercise their powers:
 

• in good faith and for a proper purpose;
• in the best interests of the company; and
• with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company and having the general knowledge, skill and experience of that director.

Directors can be held personally liable for not doing their duties.
If the directors fail in these duties, they can be held personally liable by stakeholders who have suffered a loss. Claims against directors can be brought by any stakeholder, including the company, shareholders (although this is more common in JSE-listed entities), creditors (such as banks and other entities to whom the business owes money), customers and suppliers, competitors, employees and regulatory bodies. This liability relates to the management of the business, not its performance. Professional indemnity and public liability policies will generally respond to claims arising out of the services or products provided by the business.

An example of such a personal liability claim is a financial director who failed to submit accurate documentation to the South African Revenue Service (SARS) on behalf of the company. This failure led to financial loss for the company – a hefty fine from SARS and lost tax rebates that were not claimed. The company held the director liable on the basis that he had failed in carrying out his fiduciary duties.

Creditors will also often seek recourse from the directors in their personal capacity where the business has defaulted on a loan or credit facility. Normally, the directors of a Pty Ltd-registered entity would not be liable for the debts of the business. However, if the creditor can establish that the loss arose out of a failure from the directors in carrying out their duties, there can be a case for personal liability.

Having the right insurance for business leaders can help provide protection against claims.
 

• Directors and Officers (D&O) insurance
  D&O insurance provides directors, senior managers, and certain committee members with cover for legal defence costs and damages due to losses allegedly caused by negligence, error or omissions relating to their duties. While directors of JSE-listed entities have long enjoyed the benefits of D&O cover, only 20% of business leaders of small to medium enterprises (SMEs) have D&O insurance (according to the 2020 SHA Annual Risk Review). This is largely due to:
  
  
  • misunderstandings as to whether the Companies Act applies to SMEs;
  • the misconception that claims can only come from shareholders, particularly in organisations that are privately owned or family businesses; and 
  • a general lack of awareness that the cover even exists.

It is, however, relatively easy for SMEs to get D&O cover and submitting a set of financials may not even be required.
 

• Cyberinsurance
  Cybercrime is one of the largest threats to directors and officers across the spectrum of businesses entities, regardless of size. In the 2020 SHA Annual Risk Review, 37% of SMEs revealed that they had suffered a cyberattack in the preceding 12 months. While most executives and directors are not cybersecurity specialists, the Act requires them to be informed. A lack of awareness of cyberrisk and failure to implement proper security measures and processes will almost inevitably put the board in the crossfire if stakeholders suffer losses. In addition, the business’s information officer could face a significant fine and even jail time following a breach. The good news is that cyberinsurance cover for SMEs is relatively affordable.

It is best to get expert advice – we can connect you to insurance specialists.
It is important to understand that, while comprehensive cybercoverage can protect the interests of the business, the directors are not protected in their personal capacity – only a D&O policy provides protection against personal liability. It is therefore best to have both policies in place, but it is recommended to get expert advice and to discuss your business needs with an insurance specialist.

Want to know more about our insurance expertise and offering? Here’s what to do:
 

• Contact your wealth manager who will be able to put you in touch with one of our insurance Risk Advisors.
• If you’re not a client yet and want to find out more about how we can help you put the right insurance cover in place for your business and personal needs, we would love to hear from you. You can contact us on 0860 111 263 or complete an online contact form.

DISCLAIMER
This information is for general information purposes only and is not legal advice.