In the corporate governance framework, Directors and Officers (D&O) Liability Insurance has emerged as an essential form of protection for individuals in senior positions. The importance of corporate accountability and responsibility, especially concerning the actions of directors and officers.

Through D&O insurance, companies offer directors and senior officers protection against personal liabilities they may incur due to alleged wrongful acts committed while performing their professional duties.

Given the complexities of UAE corporate laws, this insurance is pivotal for companies and executives operating within the jurisdiction.

Directors’ and Officers’ Liabilities Under UAE Law

In the UAE, directors and officers bear both fiduciary and statutory duties to act in the best interests of the company, its shareholders, and stakeholders.

The UAE Federal Decree-Law No. 32 of 2021 on Commercial Companies outlines these responsibilities in detail, explicitly holding directors accountable for breaches of duty, abuse of power, fraud, and any action that causes harm to the company or its stakeholders.

Additionally, UAE Civil Transactions Law (Federal Law No. 5 of 1985, as amended) stipulates that managers may be held personally liable for actions resulting from gross negligence, fraudulent activities, or a failure to exercise due care.

With D&O insurance, directors and officers are safeguarded against legal claims that arise from their official decisions and actions, provided these actions are within the bounds of their fiduciary duties.

The law, however, does not extend to cover acts that involve gross misconduct, fraud, or willful negligence.

UAE regulatory authorities, such as the Securities and Commodities Authority (SCA) and the Ministry of Economy (MoE), further strengthen this framework by enforcing compliance and monitoring directors’ accountability, making it crucial for directors to be adequately insured against unforeseen liabilities.

Key Liabilities Covered by D&O Insurance

The nature of D&O insurance coverage in the UAE encompasses a range of potential liabilities that directors and officers face in today’s corporate environment, including:

1. Breach of Fiduciary Duty: Directors are bound by fiduciary duties to act in the company’s best interests. The Commercial Companies Law mandates that directors act with the care of a “prudent manager” and prohibits actions that may harm the company or constitute conflicts of interest. Failure to comply can result in personal liability claims from shareholders or creditors. D&O insurance typically covers these claims, helping executives mitigate the financial repercussions of legal defense and potential settlements.
2. Misrepresentation of Company Assets or Financial Health: Misrepresentation of financial performance is a serious allegation that can lead to claims by shareholders or investors, particularly if such misrepresentation causes financial losses. The Emirates Securities and Commodities Authority and Market also enforces penalties for misrepresentation or fraudulent activities in financial statements.D&O policies provide coverage for legal fees, settlements, and judgments, thereby shielding directors from personal financial liabilities.
3. Regulatory Compliance Violations: Directors must ensure that the company adheres to all regulatory standards. Non-compliance can result in fines, penalties, and legal action initiated by UAE regulatory authorities. As the UAE continues to bolster its anti-money laundering (AML) and anti-corruption regulations through Anti-Money Laundering and Counter-Terrorism Financing (as amended), directors are increasingly accountable for the company’s compliance.D&O insurance is instrumental in covering defense costs and penalties, reducing the financial strain on individual directors.
4. Employment Practices Violations: Claims of wrongful termination, discrimination, or harassment fall under employment practices liability, which can expose directors and officers to claims by current or former employees. These claims are frequently made against individuals responsible for oversight and human resources decisions.D&O insurance provides coverage for these employment-related claims, mitigating potential liabilities arising from employment law breaches under UAE Labour Law.
5. Creditor Claims in Insolvency or Bankruptcy: In situations where a company faces insolvency, creditors may pursue claims against directors for mismanagement or misconduct leading to insolvency. UAE law permits creditors to hold directors personally accountable if they believe the directors’ actions directly contributed to the company’s financial distress. Under Bankruptcy Law, creditors are empowered to pursue personal claims against directors.D&O insurance extends protection in such scenarios, covering defense costs and settlements associated with insolvency-related claims.

D&O Insurance Position Under UAE Law: Limitations and Exclusions

The UAE legal framework permits D&O insurance to cover directors and officers, provided the claims are not related to willful misconduct or criminal acts.

Specifically, Federal Decree-Law No. 32 of 2021 excludes coverage for actions involving gross negligence, fraudulent activities, and willful violations of the law. Furthermore, claims related to personal profit derived through unlawful means, embezzlement, or conflicts of interest are not covered under typical D&O policies.

However, D&O insurance is invaluable in covering “innocent” directors who may not be directly involved in wrongful acts but are named in lawsuits due to their position within the company.

By insulating directors and officers from liabilities arising from ordinary professional conduct, D&O insurance allows them to execute their responsibilities without the fear of personal financial exposure.

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*Disclaimer: our blogs, law updates and FAQ’s are freely distributed for educational purposes and to showcase recent updates and regulations in the UAE’s framework.

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