What directors and officers insurance covers
A directors and officers policy insures individuals against personal liability for wrongful acts committed in their capacity as directors, prescribed officers or senior managers. It is not a policy for the company's own liabilities. That distinction is the whole point: a company is a separate legal person with its own assets, whereas a director who is found personally liable satisfies the judgment from their own estate.
Cover is conventionally described in three parts. Side A responds directly to the individual where the company has not indemnified them - most importantly where the company is insolvent, in business rescue, or legally prohibited from providing an indemnity. Side B reimburses the company where it has lawfully indemnified a director. Side C, where it is granted, covers the company itself for securities claims, and is far more common in listed than in private structures.
Side A is the section that actually matters most, because the circumstances in which it responds are precisely the circumstances in which a director is most exposed and the company is least able to help. A dedicated Side A limit, sitting above the main programme and not erodible by company reimbursements or entity claims, is a structural feature worth understanding rather than a technical refinement.
What a directors and officers policy typically responds to:
- Defence costs of civil claims, regulatory proceedings, inquiries and investigations.
- Damages and settlements for wrongful acts in the management of the company.
- Derivative actions brought in the name of the company under section 165 of the Companies Act.
- Delinquency and probation applications under section 162.
- Employment practices claims where the section is included.
- Extradition, asset-freezing and public relations costs, subject to sub-limits.
- Statutory liability, to the extent that insurance of the particular liability is lawful.
Where personal liability comes from: the Companies Act
The Companies Act 71 of 2008 codified directors' duties and, in doing so, sharpened the consequences of breaching them. Section 76 sets the standard of directors' conduct: a director must not use their position or information gained from it to gain an advantage or knowingly cause harm, must communicate material information to the board, and must exercise their powers in good faith, for a proper purpose, in the best interests of the company, and with the degree of care, skill and diligence reasonably expected of a person carrying out those functions and having that director's knowledge, skill and experience.
Section 76(4) provides the business judgement rule, which is the director's principal protection. A director satisfies the duties of care and good faith in respect of a particular decision if they took reasonably diligent steps to become informed, had no disqualifying personal financial interest or disclosed it properly, and had a rational basis for believing the decision was in the best interests of the company. The rule protects a considered decision that turns out badly; it does not protect an uninformed one.
Section 77 then converts breach into personal liability. A director may be held liable in accordance with the principles of the common law relating to breach of a fiduciary duty for any loss sustained by the company as a consequence of breaching section 76(2) or 76(3)(a) or (b), and in accordance with the principles relating to delict for loss arising from breach of the duty of care. Section 77(3) adds specific heads of liability, including for acquiescing in carrying on the company's business recklessly or with intent to defraud, and for being party to an act calculated to defraud creditors.
Section 218(2) casts the net wider still. Any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered as a result - a general civil remedy that is not confined to the company or its shareholders.
Source: Companies Act 71 of 2008, sections 76 (standards of directors' conduct, including the business judgement rule in section 76(4)), 77 (liability of directors and prescribed officers) and 218(2).
Section 78: what a company may and may not indemnify
Section 78 of the Companies Act governs indemnification and insurance, and it is the provision that makes directors and officers cover a governance instrument rather than an executive perquisite. Section 78(7) permits a company to indemnify a director in respect of liability, except where the section prohibits it. Section 78(8) expressly permits a company to purchase insurance to protect a director against liability or expenses for which the company is permitted to indemnify them, and to protect the company against contingent obligations arising from that indemnity.
The prohibitions are what make the insurance necessary. Section 78(6) prevents a company from indemnifying a director in respect of liability arising from wilful misconduct or wilful breach of trust, from a fine imposed following conviction of an offence, or from liability under section 77(3)(a), (b) or (c) - which covers acting without authority, acquiescing in the reckless or fraudulent carrying on of business, and being party to a defrauding of creditors.
Section 78(5) is the provision most often overlooked. A company may advance expenses to a director to defend litigation arising from their service, and may indemnify a director for those expenses, if the proceedings are abandoned or the director is successful - but the company may not advance or indemnify where the section prohibits it. The practical consequence is that where a claim engages conduct falling inside section 78(6), the company cannot fund the defence, and Side A cover becomes the director's only source of funding at exactly the moment the allegations are most serious.
Section 78(4) requires that any such indemnification or insurance be consistent with the company's Memorandum of Incorporation, so the MOI should be checked rather than assumed to permit it.
Source: Companies Act 71 of 2008, section 78 (indemnification and directors' insurance), particularly subsections 78(4), 78(5), 78(6), 78(7) and 78(8).
Who actually brings the claim
Directors frequently assume that the threat comes from shareholders. In South African private companies it more often comes from four other directions, and understanding them changes how the cover is specified.
The first is the company itself, acting through a new board, a business rescue practitioner or a liquidator. Section 165 of the Companies Act allows a shareholder, director, trade union or employee representative to demand that the company institute proceedings, and to apply to court for leave to bring a derivative action in the company's name if it does not. A change of control or an insolvency turns internal disagreements into litigation with a funded claimant.
The second is a delinquency application under section 162, which allows a court to declare a director delinquent or under probation. A delinquency declaration is disqualifying and can last for a minimum of seven years, which makes defence costs a matter of professional survival rather than commercial calculation.
The third is a regulator. Sector regulators, the Companies and Intellectual Property Commission, the Information Regulator, the South African Revenue Service and the competition authorities all conduct investigations in which directors are required to participate personally, and the cost of doing so properly is significant even where no finding follows.
The fourth is an employee. Employment practices claims - unfair dismissal of a senior executive, discrimination, harassment and retaliation allegations - are commonly directed at individual managers as well as the company, and the employment practices section is where many private-company policies actually respond.
Source: Companies Act 71 of 2008, sections 162 (declaration of delinquency and probation) and 165 (derivative actions).
King IV and the evidence of a considered decision
The King IV Report on Corporate Governance for South Africa is not legislation, but it is the reference point against which board conduct is measured in practice, and its principles are frequently invoked in argument about whether a director exercised reasonable care. It applies on an apply-and-explain basis across entity types, including private companies, non-profits, retirement funds and state-owned entities.
For insurance purposes the significance of King IV is evidential. The business judgement rule in section 76(4) turns on whether the director took reasonably diligent steps to become informed and had a rational basis for the decision. The board pack, the minute recording the discussion and the alternatives considered, the declaration and management of conflicts, the record of external advice taken and the terms on which it was given are the material from which that is demonstrated years later.
A minute that records only the resolution is a weak record. A minute that records the information before the board, the concerns raised, the advice received and the reasoning is a strong one, and it costs nothing more to produce at the time.
Structural traps in the wording
Directors and officers policies are written on a claims-made basis, which means they respond to claims first made against the insured during the period of insurance, regardless of when the underlying conduct occurred. Several structural consequences follow, and each of them has caused directors to discover that they had no cover for a matter they assumed was insured.
The retroactive date determines how far back conduct is covered. Changing insurer and accepting a new retroactive date can silently strip cover for years of prior service. Run-off cover matters just as much: a director who resigns, or a company that is sold, wound up or delisted, remains exposed to claims made years later, and only a run-off extension purchased at the time keeps that cover alive. Once the policy lapses without run-off, it cannot be bought retrospectively.
Three wording features deserve specific attention. The insured versus insured exclusion, if drafted broadly, can exclude the derivative and liquidator claims that represent the most likely source of loss - a carve-back for derivative actions and for claims brought by a liquidator or business rescue practitioner is important. Severability determines whether one director's dishonesty voids cover for innocent colleagues, and non-imputation wording should be confirmed. And the conduct exclusions for dishonesty and improper personal gain should apply only following a final adjudication, so that defence costs remain available while the allegation is being contested.
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COMMON QUESTIONS
Directors and officers insurance questions, answered clearly.
What is directors and officers insurance?
A directors and officers policy insures individuals against personal liability for wrongful acts committed in their capacity as directors, prescribed officers or senior managers, and funds the cost of defending those allegations. It is not cover for the company's own liabilities. The insured persons, allegations, defence costs and exclusions depend on the policy wording and the underwriting terms.
Is directors and officers insurance only for listed companies?
No. The duties in sections 76 and 77 of the Companies Act 71 of 2008 apply to directors of private companies, non-profit companies, sectional-title bodies and state-owned entities alike, and liability attaches to the individual personally. The exposure follows the person rather than the size of the balance sheet and needs to be assessed in its own context.
Does the Companies Act allow a company to insure its directors?
Yes. Section 78(8) of the Companies Act 71 of 2008 expressly permits a company to purchase insurance to protect a director against liability or expenses for which the company is permitted to indemnify them. Section 78(4) requires this to be consistent with the company's Memorandum of Incorporation, so the MOI should be checked rather than assumed to permit it.
What is the difference between Side A, Side B and Side C cover?
Side A responds directly to the individual where the company has not indemnified them, which includes situations where the company is insolvent, in business rescue or legally prohibited from indemnifying. Side B reimburses the company for indemnities it has lawfully provided. Side C covers the company itself for securities claims and is far more common in listed structures than in private ones.
What is the business judgement rule?
Section 76(4) of the Companies Act provides that a director satisfies the duties of care, skill, diligence and good faith in respect of a particular decision if they took reasonably diligent steps to become informed, had no undisclosed disqualifying personal financial interest, and had a rational basis for believing the decision was in the best interests of the company. It protects a considered decision that turns out badly; it does not protect an uninformed one.
Does a board minute remove liability exposure?
No, but the quality of the record is often decisive. Because the business judgement rule turns on whether the director took reasonably diligent steps to become informed and had a rational basis for the decision, a minute that records the information before the board, the concerns raised, the advice received and the reasoning is materially stronger evidence than one recording only the resolution.
What is run-off cover and when is it needed?
Directors and officers policies are written on a claims-made basis, so they respond only to claims first made during the period of insurance. A director who resigns, or a company that is sold, wound up or delisted, remains exposed to claims made years later. Run-off cover extends the reporting period for prior conduct and must be purchased at the time; it cannot be bought once the policy has lapsed.
Can a director be sued by their own company?
Yes, and it is one of the more common sources of claim. Section 165 of the Companies Act allows a shareholder, director, trade union or employee representative to demand that the company institute proceedings and, failing that, to apply to court for leave to bring a derivative action in the company's name. A new board, a liquidator or a business rescue practitioner may also pursue former directors.
Are fines and penalties covered?
Generally not. Section 78(6) of the Companies Act prohibits a company from indemnifying a director for a fine imposed following conviction of an offence, and insurability of penalties is in any event a question of law and of policy wording. Defence costs are usually the significant benefit in a regulatory matter, and the distinction between defending the proceedings and paying the penalty should be confirmed specifically.
What happens if one director acted dishonestly?
That depends on the severability and non-imputation wording. Well-drafted policies provide that the conduct and knowledge of one insured person is not imputed to innocent co-insureds, and that conduct exclusions for dishonesty or improper personal gain apply only following a final adjudication, so that defence costs remain available while the allegation is contested. These provisions should be checked rather than assumed.
