What is Directors and Officers Insurance?

Each year, there are about 1,300 claims made against directors and officers of American businesses, with the average reported loss costing companies around $400,000. D&O insurance is a liability policy covering a company’s management, and the business itself, in the case of a lawsuit brought against the directors and officers of that company.

With this form of insurance, the personal assets of each director and officer are protected from lawsuits, and the company itself receives coverage for legal fees, settlements, and other related expenses.

The industries in which businesses most commonly purchase D&O insurance are healthcare, transportation and utilities, manufacturing, business services, wholesale and retail trade, and construction. While D&O insurance is more popular among larger companies, even small businesses with less than 100 employees often find the coverage helpful.

Currently, 68% of businesses with 100 or more employees carry D&O insurance compared to 53% of small businesses.

D&O insurance covers more than just directors and officers. In addition to those key players, D&O coverage also protects board members and managers, and sometimes committee members, employees, and even some volunteers.

In short, depending on your policy, D&O insurance usually covers anyone conducting official business under the direction of your company.

If your company acquires D&O insurance, your directors and officers will be protected from claims based on their business actions. If someone in management is to blame, whether directly or indirectly, for negative financial consequences affecting the company, your D&O insurance policy can protect you if you’re sued for the following reasons:

• Wrongful acts (actual or alleged)

• Omissions

• Decisions

• Inappropriate securities trading

There are many possible claims that can arise from these broad categories and a wide range of issues that can lead to a claim. These are some of the most common claims that D&O insurance helps protect you against:

• Shareholder lawsuits due to poor performance

• Creditor or investor lawsuits due to mismanaged finances

• Officers issuing decisions they don’t have the authority to make

• Failure to comply with rules, regulations, or laws

• Human resources claims and employment issues

• Regulatory claims

• Cyber liability

More than half of all lawsuits or fines brought against directors and officers are from customers. The next-most common source is suppliers and vendors, followed by government entities, competitors, and other partners or shareholders.

Most D&O insurance policies have a standard set of exclusions. In general, most of the items on this list are either illegal, or are covered by other types of insurance policies:

• Property damage or bodily injury

• Dishonesty, fraud, intentional noncompliance

• Breach of contract

• Actions for personal profit

• Pollution and environmental violations

• Claims covered by other policies

• Claims made while under a previous policy

There are three different sides to the typical D&O insurance policy, with each of them protecting the company and its management team in a different way. Typically, these three coverages are packaged together for convenience, but you can purchase varying levels of each coverages to suit your company’s unique needs.

• Side A: This covers the defense costs, judgments, or settlement fees for a company’s directors, officers, and employees. This coverage kicks in only if the company itself cannot compensate for these costs, as in cases of bankruptcy or insolvency.

• Side B: This side covers the business itself for compensated losses caused by claims against directors, officers, and employees.

• Side C: Also known as “entity coverage,” this side is essentially a form of balance sheet protection for the business. This coverage ends disputes regarding allocation of coverage if both the company itself and its directors and officers are named as defendants in a lawsuit.

In short, coverage A deals with the protection of individual executives or managers, even when the company doesn’t have the funds (or the legal right) to indemnify those employees. Coverages B and C covers the company, both for indemnifying employees, and for protecting the business itself in the case of lawsuits.

Aside from the obvious financial benefits of having D&O insurance for your company, there are also some other advantages.

First and foremost, D&O coverage can help you attract and retain your leadership, since their personal liability is protected by your insurance policy. If your individual directors and officers are all exposed to personal liability, it makes your company a much less appealing place to work.

Another benefit is that it can help attract investors. Some venture capital firms will not even consider investing in businesses that do not carry D&O insurance. Finally, even if the claim brought against your leadership is dismissed, D&O insurance can cover whatever legal fees you’re still responsible for.

Directors and officers coverage may not be necessary for very small companies with modest growth expectations, but for any other business it’s at least worth considering based on the vital protection is can provide your business and its leaders.