Directors and Officers Insurance

Posted September 26th, 2018 by Jason Metz

Directors and officers (D&O) liability insurance covers lawsuits against individuals who are serving on a board of directors and/or as an officer of a company. The policy can pay for a legal judgment where the person company is held liable. It can also pay for legal defense, even when there hasn't been any wrongdoing.

Who needs directors and officers insurance?

If your company has a corporate board or advisory committee, it's worth considering directors and officers insurance. It can cover directors and officers of:

  • For-profit businesses.
  • Privately held firms.
  • Not-for-profit organizations.
  • Educational institutions.

Why buy directors and officers insurance?

D&O insurance is a way to help attract and keep people who serve on a board or as an officer. People may not want the positions if they could be held personally liable for their decisions or actions on behalf of the business.

The average total cost to a company from a D&O problem is $387,000, according the Chubb Private Company Risk Survey 2016.

D&O lawsuit costs can include judgments or settlements, legal fees and fines. There can be additional negative impact on a business that you may not have thought about, such as loss of employee morale and productivity.

There are a few "sides" to a D&O insurance policy:

  • Side A—this protects a company's individual directors and officers from claims not covered (or indemnified) by the company's liability insurance policy. You can buy a D&O policy with only this coverage, referred to as "standalone Side A."

  • Side B—this reimburses the company for payments made to indemnify directors and officers for liability lawsuits against them.

  • Side C—this covers both the company and the directors and officers if they are named in shareholder litigation. It's known as "entity coverage."

Examples of claims against directors and officers

Commercial general liability insurance policy may not cover you for the mismanagement of your company. Directors and officers insurance can help protect your company's leadership against a wide range of claims made against them, including:

  • Shareholder suits over company or stock performance.
  • Creditor or investor suits over mismanagement of fiduciary duties which might result in financial losses or bankruptcy.
  • Misuse of company funds.
  • Misrepresentation in your company's prospectus.
  • Theft of intellectual property.
  • Decisions that exceeded the authority granted to a company officer.
  • Failure to comply with workplace laws.
  • Employment practices and HR issues.
  • Pollution and other regulatory claims.
  • Cyber liability, including data breaches.

Some types of claims or misconduct may be excluded in a typical D&O policy, such as:

  • Fraud.
  • Personal profiting by the director or officer.
  • Litigation (pending or prior) that precedes the start of your D&O policy.
  • Bodily injury claims.
  • Property-damage claims.
  • Employee Retirement Income Security Act (ERISA) claims.
  • Certain corporate activities such as joint ventures, mergers and acquisitions or an initial public offering (IPO).

How much does directors and officers insurance cost?

The amount coverage you select will be a big factor into the cost of directors and officers insurance. Risk factors can also affect the cost of a D&O policy, such as:

  • The type of business and industry sector.
  • The amount of company debt.
  • Revenue.
  • The number of employees
  • A history of legal claims.
  • Merger and acquisition activity.