Directors’ Liability Insurance


The most distinctive characteristic of a company is its distinct legal personality and because it is an artificial person – a legal contraption, it cannot act by itself but only through its organs and agents. The organs include

  • its members in General Meeting
  • its Board of Directors
  • its officers or agents that are appointed by, or acting under the authority of, the members in General Meeting or the Board of Directors.

For the most part, directors are regarded as the alter ego (mind) of a company and they are responsible for the management of the company’s business. Consequently,   the acts of the company’s directors are treated as the acts of the company itself and the company shall be criminally and civilly liable therefore to the same extent as if it were a natural person. However, the law equally imposes certain duties on directors.

Directors are generally seen as agents of the company when they are acting within their authority and the powers of the company. They stand in a fiduciary relationship towards the company and they are required to observe the utmost good faith towards the company while dealing with the company and while acting on the company’s behalf, as agent of a particular shareholder and where even though agent of any shareholder, such shareholder or other person is dealing with the company’s securities. The director shall act at all times in what he believes to be the best interests of the company. Furthermore, a director of a company shall exercise the powers and discharge the duties of his office honestly, in good faith and in the best interests of the company, and shall exercise that degree of care, diligence and skill which a reasonably prudent director would exercise in comparable circumstances

A breach of any of the imposed duties may expose an erring director to liability to the company’s subscribers, business partners, clients or any other third party, as the case may be. For example,  the Companies and Allied Matters Act, 1990 (CAP C20, LFN 2004) (“CAMA”) makes all the duties of the directors provided under section 279 such as fiduciary duties and duty of utmost good faith enforceable against the directors in their personal capacities. In addition, failure of the directors to take reasonable care in accordance with the provisions of section 282 of CAMA, shall ground an action for negligence and breach of duty against such directors personally. More so, when a director makes secret profit or derives unnecessary benefit from the company without disclosing his interest to the company, he shall be liable for such secret profits or benefit. Also, where directors divert money received as loan for the purpose of the company’s operations, such directors will be personally liable.  Where the directors act beyond the authority provided for in the Memorandum and Articles of Association of the company, the directors will equally be personally responsible for their actions. In any of these occasions, the directors may be sued alongside their companies and suffer loss as a result.

Given the risks of liabilities to which directors may be exposed to by reason of their positions in the company, it is advisable to take out Directors’ Liability Insurance in order to mitigate losses that may arise from such risks.

Directors’ Liability Insurance

Directors Liability Insurance (“DLI”), also known as Directors and Officers Liability Insurance, is insurance coverage intended to protect individuals from personal losses if they are exposed to liability as a result of serving as a director or an officer of a business or other type of organization. It can also cover the legal fees and other costs the organization may incur as a result of a lawsuit.

Scope of Directors Liability Insurance

DLI is generally taken out by companies on behalf of their Directors. The directors may also take it on their own and in such instances; they would either completely bear the premium or share it with the company. Companies purchase the insurance cover because managers can make mistakes.The coverage includes financial protection for managers against the consequences of actual or alleged “wrongful acts”. Coverage is usually for current, future and past directors and officers of a company and its subsidiaries. It covers the cost arising from civil, criminal and regulatory investigations and actions brought against the directors. It also extends to actions arising from employment and Human Relations practices, costs incurred by the shareholders in prosecution of claims against the directors, insolvencies, mergers and acquisitions, etc.

However, DLI would generally not cover actions arising from fraud or dishonesty, libel and slander, intentional non-compliant acts, illegal remuneration or personal profit, personal injury, property damage, bodily harm, claims made under a previous policy, etc.

Furthermore, under Nigerian law, Section 279(8) of the CAMA prevents any provision from being made in the articles or resolutions of a company, or in any contract, to relieve any director from the duty to act in accordance with his fiduciary duties and in utmost good faith or to relieve him from any liability incurred as a result of any breach of such duties. It has been suggested however that the provision contemplates situations where Directors act in breach as opposed to where they act in good faith. The implication is that the company is equally precluded from taking out an insurance policy on behalf of the director in respect of any liability arising from a breach of the said duties.

It is apparent that Nigerian Law imposes a high standard on the directors in the performance of their duties and it does not exempt them from any liabilities arising from these duties.  However, the position that directors hold is very significant with the possibilities of mistakes and errors arising from their actions and inactions. With so much at risk, it is understandable that they should be insured from liabilities.


With the nature of duties that the directors carry out for companies and the standards to be complied with under the CAMA, DLI as a form of risk management is not out of place. However, considering the strict provisions of CAMA and other laws regulating corporate governance, the DLI policies taken on behalf of the directors must comply with the relevant laws. For example, the Banks and Other Financial Institutions Act Cap.  B 3 Volume 2 the Laws of the Federation of Nigeria 2004 (“BOFIA”), the legislation regulating the financial industry, provides that any director or manager of a bank, who fails to ­ take all reasonable steps to secure compliance by the bank with the requirements of BOFIA or take all reasonable  steps to  secure  the  correctness of any statement submitted  under the provisions of BOFIA, is guilty of an offence and liable on conviction to  a fine not exceeding ₦50,000 (Fifty Thousand Naira Only)  or imprisonment for a term of three years or to such  fine and imprisonment.

Thus, the DLI may only be taken in respect of liabilities which are not occasioned by reason of failure to exercise good faith or for breach of a fiduciary duty or arising out of an illegal or fraudulent act.

Save for the identified exceptions, the DLI should be encouraged as it helps in managing risk in the corporate world and it would alleviate the fears of efficient corporate professionals in the exercise of their best professional/managerial judgment and encourage them to take more managerial roles.

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