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ARE YOU COVERED FOR INDEMNIFICATION AND INSURANCE?

It's a fundamental principle of company law that a company is a legal entity in its own right; independent from its shareholders and governed by its directors. However, directors and employees can still be personally liable for their acts or omissions. 

Indemnification

Under the Companies Act 1993 (the "Act"), a company may indemnify (agree to use its assets to satisfy a liability) its directors and employees in respect of claims made against them, as well as the costs associated in challenging claims, except generally in the case of criminal liability, or breach of the duty to act in good faith and in the interests of the company.

Insurance

To further protect directors and employees from financial liability, the Act permits a company to obtain directors and officers insurance, which again can meet the costs of defending and (if required) satisfying a claim; however as with indemnification by the company, insurance cover with respect to criminal liability is limited.

The company constitution

Both of the above require the constitution of the company to expressly permit indemnification to be granted and for insurance to be taken out. Without that (and the procedural requirements of the Act being followed) the company cannot validly indemnify or insure.

Upon incorporation, a company is not required to have a constitution, however over time and as a business grows, this should be revisited, to consider if the above permissions (as well as other permissive provisions available under the Act) should be included.

Who should be covered?

Indemnification and insurance cover are especially important for service businesses or those who deal with third party property or other assets.

There is now a range of specialised insurance products on the market. Expert advice should be obtained when taking out these types of policies and any exclusions contained in the policies should be carefully reviewed and fully understood.

If you are a director or senior officer it is worth checking:

-       If the company has director and officer (known as D&O) insurance in place;

-       If you are indemnified by the company;

-       If the company's constitution permits insurance and indemnification.

Written by Mark O'Donnell at 09:00

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