Directors' and officers' liability insurance (D&O)

What this policy actually insures

Before anything else, one thing is worth clearing up – the point most often misunderstood in D&O material. D&O does not cover the company's losses. It covers the officer's legal liability to compensate those losses. If an SIA loses money because of an unfavourable decision and nobody brings a claim, the policy pays nothing. The event the policy responds to is a claim against the officer, not the loss itself.

Who needs this solution

• Board and supervisory council members – in limited liability companies (SIA) and in joint-stock companies alike; Section 169 of the Commercial Law (Komerclikums) applies to both;
• groups of companies – a single programme for the directors of the parent and its subsidiaries;
• companies with outside investors or pledged shares – investors and lenders often require D&O as a governance standard;
• fast-growing companies – as turnover and liabilities grow, so does the sum the management may have to answer for;
• companies in financial difficulty or in transition – proximity to insolvency is the biggest personal liability risk for board members (a word of caution: at that stage it may already be too late to buy the policy – better to do it in good time);
• directors appointed to the boards of other companies – outside positions can be included in the cover as well.

What personal liability rests on in Latvia

Three statutory grounds worth knowing precisely, because they determine what the policy protects against in the first place.

For the sake of precision, on the burden of proof. Section 169(3) does indeed shift the burden of proof onto the officer, but only as regards diligence. The claimant still has to prove the act or omission, the loss and the causal link. Section 169(4) likewise provides a safe harbour: an officer is not liable if they acted in good faith within a lawful resolution of the shareholders' meeting.

One more practical point on tax: the threshold in Section 60 of the law On Taxes and Fees is expressed in minimum monthly salaries, so the amount changes every year. These proceedings are a matter of public law, not civil law, and they also reach a person who actually performs the functions of the board, not only the registered board member.

What a board member needs protection from

How D&O is built: Side A, Side B and Side C

This is the first thing I look at in a quote, and it is precisely this structure that most often goes unexplained. Latvian has no established term for these parts, so the English terms are used here and explained.

A practical note. The retention can differ for each part, and in quotes this is often spotted too late. On the Latvian market it is realistic to agree a nil deductible for both Side A and Side B. Watch one piece of wording: many policy wordings apply the Side B deductible to a Side A loss where the company was permitted to indemnify but did not do so.

Several policies also carry an additional limit for officers (Directors' Additional Limit) precisely for those losses the company is not permitted to indemnify. It sits outside the overall limit and is one of the rare cases where the cover is not shared with everyone else.

How the "claims made" principle works

D&O is written on a claims-made basis. Cover is triggered in two situations, and the second of them usually goes unnoticed:

• a claim is made against the insured person for the first time during the policy period and the insurer is notified of it within the same period or within the agreed extended period; or
• circumstances that may give rise to a claim are notified to the insurer during the policy period – a claim made later is then treated as having been made in the period in which the circumstances were notified.

Why notification of circumstances is the most important skill in the whole policy. If you know that something may grow into a claim – a complaint has arrived, an inspection has started, a shareholder is demanding documents – and you notify it while the policy is in force, the cover stays with that year's policy even if the claim is brought three years later. If you do not notify it, the next policy will exclude the matter as a circumstance already known. This is where the most cover is lost.

Three dates that must not be confused

Full prior acts cover on renewal is the market norm, not something exotic. For a first-time buyer it is much rarer – for a new client the insurer often sets the retroactive date equal to the inception of the policy. So in the first year it is worth asking about this directly, and in the second year checking that the dates are not quietly moved forward.

Sub-limits: where the real difference between quotes hides

If two quotes are offered with the same limit of indemnity, that on its own means nothing. Several of the most important parts of the cover in practice operate only up to a sub-limit – and that is exactly where quotes differ most. A sub-limit in the policy is a specific sum of money, not a percentage of the limit, and it is part of the overall limit, not an addition to it.

What D&O is not. D&O is not corporate cyber insurance. It responds to a claim against a director for failing to manage cyber risk properly, not to the company's own losses from a data breach or system downtime. If cyber cover appears in a quote as a D&O section, understand that this means a small assistance budget, not a cyber policy.

What a standard quote often overlooks

• Adequacy and sharing of the limit. The limit is usually shared by all directors, all claims and defence costs across the whole policy year, not per claim. In lengthy litigation it runs out faster than it seems.
• The insolvency exclusion. In precisely the scenario where the risk is greatest, some quotes narrow the cover or exclude it altogether. More on this – in the next section.
• The extended reporting period. By default it can be anything from a few dozen days to 12 months – the difference is enormous, and the figure usually does not appear in the main text of the quote.
• Insured vs insured. Most European wordings apply this exclusion only to US claims, so a Latvian SIA's claim against its own board member is usually not excluded. What has to be checked is exactly this: whether the wording is limited to the US – and what the policy defines as the "company".
• Group structure and outside positions. Subsidiaries, foreign entities and positions on the boards of other group companies have to be included deliberately – by default they may fall outside the cover. This also affects the previous point: a parent company's claim is excluded only if the parent is itself an insured person.
• Territory. The D&O default is worldwide cover. Insurers manage US and Canadian risk not through a territorial exclusion but through specific conditions – for US claims, US securities offerings and the like. If the group has a US entity, it may need a separate local policy.
• Conduct of the defence. D&O is usually not a policy in which the insurer runs the defence. The insured chooses the lawyer, with the insurer's agreement. So the consent procedure and any caps on hourly rates should be read beforehand.

The insolvency exclusion: the most important point on the Latvian market

Claims by the insolvency administrator and by creditors against former management are one of the most realistic D&O scenarios. At the same time, it is precisely this risk that some policies exclude by way of a special condition – and it cannot always be removed, even after negotiation.

What to take from this. If a policy contains an insolvency exclusion it can still be valuable – it simply no longer covers the scenario for which many people buy the policy in the first place. So: (1) I ask for written confirmation of whether the exclusion can be removed and at what premium; (2) if not, I compare it with an insurer that has no such exclusion and show the price difference clearly; (3) the client takes the decision, but knowing exactly what they are not getting for the money saved.

For a new company that has not yet filed its first annual report, an insolvency exclusion is a fairly common condition on the Latvian market. The practical solution in that case is usually to take out the policy now and to negotiate removal of the exclusion at renewal, once a financial history is available.

Alongside this, it is worth knowing what the Insolvency Law does not say. The duty to file an insolvency petition is expressed by the word "immediately", not as a specific number of days, and the law provides no separate civil liability for failing to comply with it. Late filing gives rise to administrative liability and serves as one of the criteria in the VID tax proceedings, while a claim for losses is still brought on the basis of Section 169 of the Commercial Law.

The extended reporting period (discovery period)

If the policy is renewed without a break and the continuity date is carried over, decisions taken earlier remain covered. The extended period becomes decisive in other situations, and there is more than one of them:

• the policy is not renewed, or the insurer is changed without the dates being carried over;
• there is a change of control – the company is sold or merged into another; in many policies this automatically switches the cover into run-off;
• the company is liquidated;
• a board member leaves office – some wordings provide a separate, longer period for former officers.

How long the period should be in Latvia. Section 169(5) of the Commercial Law sets a five-year limitation period from the day the loss was caused. That is the natural reference point for the length of a run-off period: a shorter period leaves part of the time in which a claim is still possible uncovered. In practice the market offers from a few dozen days up to 12 months as standard, and an extension for an additional premium – I have arranged up to 36 months. The extension can only be bought at the end of the policy or shortly before it, not afterwards.

How to choose the limit

The most common answer I hear from a client is "I don't know, what would the insurer recommend?". That is understandable, because there is no reference point. In practice I tie the limit to the company's real numbers, not to a feeling:

• The scale of liabilities. If the company's liabilities run into millions, a claim together with the defence costs will eat up a small limit entirely.
• The limit is an aggregate for the whole year. Two claims in one period share the same sum, and defence costs count against that same limit.
• A step up costs disproportionately little. The pricing scale in liability insurance is degressive: doubling the limit rarely doubles the premium. That is why, before a decision, I always ask for prices at several limits, not just one.
• Comparison with turnover. For small and medium-sized companies the annual premium is usually a small fraction of one per cent of annual turnover – a useful way to discuss the cost at a board meeting.

Decision table: what to check in a D&O quote

What to expect from the process in Latvia

D&O is not a product you arrange in a day, and part of the time goes on things that are not visible from the outside. What is worth knowing at the planning stage:

• Not every insurer operating in Latvia offers D&O. Some simply do not have the product, so the real choice is narrower than you might think. It also means that one insurer's refusal is not yet the market's answer.
• Every insurer has its own proposal form. One completed proposal form cannot be used everywhere; in practice this means several forms and a few extra questions for the accounts department.
• Some quotes go through reinsurers. That lengthens the timeline, which is why I start arranging a renewal or a new policy in good time, not in the last week.
• Cover is hard to obtain for companies that have been trading for less than two or three years. Insurers justify this on the basis that financial trends cannot be assessed. Solutions do exist – the question is on what special conditions.
• A policy period cannot start in the past. That does not mean past decisions are uncovered – on the contrary, they are covered by the retroactive cover. What you cannot insure is the dispute you already know about.
• The proposal form becomes part of the contract. Before the policy is issued you have to sign a declaration that the information provided has not changed and that no insured person is aware of circumstances that could give rise to a claim. This is exactly the document that will be relied on in a coverage dispute.

Information and documents required

• The structure of the company (or group), its shareholders and the composition of management
• Financial statements for the last 1-2 years (balance sheet and profit and loss account)
• A management balance sheet for the current quarter, if the year is already well under way
• A description of the business and the most significant contracts or projects
• Information on known disputes or circumstances that may give rise to claims
• Whether there have been complaints against management or data security incidents in recent years
• Whether board members have given personal guarantees for the company's liabilities
• Whether board members hold positions in other group companies
• The desired limit (or several options for comparison) and the relevant jurisdictions

What affects the price and the terms

The premium is set by the company's financial position and industry, its turnover and balance sheet structure, the complexity of the group and its jurisdictions, the chosen limit and sub-limits, the deductible, and the history – any known disputes or circumstances. For financially sound companies D&O is usually relatively affordable cover; for those in difficulty it is expensive or unobtainable, which is why it should be arranged in good time. Because the premium scale is degressive, I always build the price comparison on at least two or three limits: it often turns out that a higher limit costs far less than the client expected.

Typical exclusions

D&O usually does not cover deliberate fraud, wilful breaches of the law or personal profit to which the person was not entitled. The wording matters: in the best policy wordings these exclusions bite only after a final, non-appealable judgment or an admission, not after a first-instance judgment. Until then defence costs are usually paid, but once the breach is established the insurer can claim them back.

On a board with several members the severability clause is decisive: the conduct and knowledge of one board member are not attributed to the others. Without it, one person's fraud can knock out the cover for everyone.

Fines are not insurable in Latvia, and that is set not by the policy but by statute: Section 52(3) of the Insurance Contract Law (Apdrošināšanas līguma likums) provides that in civil liability insurance the indemnity does not cover a fine, late payment charge or other sanction imposed on the insured. Section 52(2), by contrast, expressly allows the costs of litigation, expert examination and the defence of one's interests to be covered. The practical formula is therefore simple: defence costs yes, the fine itself no. If a quote or an advertisement promises to cover "fines and sanctions", that is a signal to read more carefully.

D&O also does not cover claims and circumstances that were known before the policy was taken out.

D&O and physical injury: where the boundary is not where it seems

D&O is a financial loss product and it does not indemnify harm to health, life or property – that is handled by the company's general liability and property policies. The exclusion, however, almost always has a carve-back: an officer's defence costs in occupational health and safety proceedings are usually covered by D&O, even where the event itself is an injury to a person. In Latvia, where breaches of occupational safety rules can lead to proceedings directly against the director, this is one of the most valuable carve-backs in practice.

D&O or professional indemnity insurance?

These two products are often confused. D&O covers the officer as a director of the company: decisions, governance, information given to shareholders and creditors. Professional indemnity insurance covers errors in the service the company provides: design, engineering solutions, advice, calculations. An engineering practice, a designer or a consultant needs both.

One nuance is worth knowing: the professional services exclusion is common in D&O policies but is not automatic – some wordings do not have it at all, in others it is added by a separate endorsement. In practice it bites less often than people think, because a claim over a professional error is usually brought against the company, not against the board member personally.

How I work with D&O

I assess the risk profile of the company and its management, help choose a sensible limit and request quotes at several limits, so that the price difference is visible too. I compare quotes precisely on the critical points – the Side A and Side B retentions, the sub-limits, the three dates, the insolvency exclusion, the scope of the insured vs insured exclusion, the procedure for notifying circumstances, the range of insured persons. Where conditions are unclear I ask the insurer to confirm them in writing, because an oral assurance is of no help in a claim. D&O is an area in which the policy wording is decisive: two policies with a similar premium can differ in exactly the situations for which the policy is bought in the first place. If the cheapest quote is not the safest, I say so directly and show what the client is not getting for the money saved. If a claim arises, I help with the notification and with the process through to resolution.

Practical examples

Notification of circumstances (a generalised example, not a specific client's case): in the autumn a board member receives a letter from a shareholder complaining about a particular transaction. No claim is brought, and the matter is forgotten. The following spring the policy is renewed with a different insurer, and a year after that the shareholder goes to court. The new insurer excludes the matter as a circumstance known before the policy, and the old one excludes it because the claim was made after its period. Had the letter been notified when it arrived, the matter would have stayed with the first policy.

Two quotes with the same limit (a generalised example): the board of a growing company receives two quotes with the same limit of indemnity, and the cheaper one is noticeably better value. The difference shows up in the wording: the cheaper one carries a special condition excluding insolvency risks, lower sub-limits for tax liability and a short reporting period after the policy ends. For a company with pledged shares and growing liabilities these three points are precisely the most important ones, so in this situation the more expensive quote is the safer one. The cheaper one can be offered as a budget option, but called by its proper name.

Frequently asked questions

This page provides general information about directors' and officers' liability insurance and is not individual insurance advice. Actual cover always depends on the chosen insurer's wording, the special conditions in the policy and your situation – we will assess those together before any decision.

Related solutions

• Answer: does D&O cover a claim by the insolvency administrator?
• Answer: what do Side A and Side B mean in a D&O policy?
• Answer: does D&O cover a claim brought by the company itself?
• Answer: how long after the policy ends can a claim be notified?
• Answer: can a newly formed company buy D&O?
• Professional indemnity insurance (PI)
• Surety bonds and guarantees
• Commercial property and business interruption insurance
• All solutions for businesses