Directors and officers liability insurance is professional insurance as held by accountants, auditors, real estate brokers, air controllers, doctors, etc. It is quite common in foreign practice, as it involves the management of company risks with the aim to increase the security of company assets.
Governing and supervisory bodies are insured within the scope of D&O liability policies, frequently along with other low management executives at a company who take risky decisions. Such policies always include a series of exclusions, such illegal actions, negligence and decision-making by governing and supervisory bodies without due diligence. Hence, management and supervisory boards remain accountable with all their property despite the insurance and have to prove the diligence of their actions in tort actions.
Such liability insurance for governing and supervisory bodies protect company interests and not those of an individual. If a company has taken out such a policy, it may pursue the interest of damage reimbursement to the company. The insurance company can later on enforce recourse claims against such persons. The amount of damage is recovered from the insurance company (through court or out-of-court settlement) for the account of the company in an amount exceeding the property of the sued members of the bodies. Naturally, various other products are available to secure their property, which usually include much lower coverage that suffices only for the payment of legal costs and cannot cover damages worth several millions to the company from the policies. A lack of knowledge and understanding of such insurance is also revealed in tax treatment, since insured persons are recognised as those receiving benefits from it, which is why they pay the benefit. They can never have any benefit from it, but the company can.
D&O insurance may be concluded in two ways:
- as insurance for an individual person where the insurance buyer is a natural person who as a rule pays the premium; and
- as corporate insurance where the insurance buyer is a company which also pays the premiums.
Individual insurance covers damage claims made by third parties or, under somewhat more stringent conditions, by the company, but does not cover damage claims against the company, but only against an individual member who took out the insurance. Claims against a company are covered by corporate insurance. In corporate insurance, the insurance buyer is a company and all managers at the company are insured (mostly the current members of governing and supervisory bodies, but sometimes also members of bodies at subsidiaries; however, that needs to be checked in the applicable general terms and conditions) along with the company. That means that such a policy in principle also covers damages arising from claims that might, for instance, be made against the company by shareholders. An important difference between the two lies in the amount of cover. In individual insurance, the limit is intended only for the insured person and is not distributed to other insured persons, but to one person only. In corporate insurance, however, the cover is distributed between all other insured persons.
In relation to the tax treatment of premiums for the insurance of liability of management and supervisory board members, the Tax Administration of the Republic of Slovenia and the Ministry of Finance issued two explanations. In May 2011, a new explanation was published by the Tax Administration which, however, brought nothing new, since premium payments made by a company for such insurance products are still considered in terms of tax as a benefit. After the amendment of Article 263 of the Companies Act, the tax treatment for directors’ and officers’ liability insurance remains unchanged (28 January 2016): (*only in Slovene language)
- Pojasnilo MF, št. 007-13/2016, 28.1.2016
- Pojasnilo DURS, št. 4210-6628/2011, 25.5.2011
- Pojasnilo MF, št. 421-157/2008, 3. 9. 2008
- Pojasnilo DURS, št. 4210-23/2006, 2.4.2007
Companies Act (Official Gazette of the Republic of Slovenia, No. 55/15) - Article 263(2): If a company concludes an insurance contract to insure the members of its governing and supervisory bodies against risks deriving from the pursuit of their function at the company, the deductible must be set at least in the amount of 10% of damages, but no more than 1.5 times their fixed annual remuneration.
Research and Studies:
- Guide to Directors’ Duties and Liabilities, ecoDa in AIG, 2015
Recommended reading: >>> in Slovene language