Directors and Officers (D&O) Insurance Complete Guide
Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company. Many officers and directors will want a company to provide both indemnification and D&O insurance.
Directors and officers are sued for a variety of reasons related to their company roles, including:
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Misrepresentation of company assets
- Misuse of company funds
- Failure to comply with workplace laws
- Theft of intellectual property and poaching of competitor’s customers
- Lack of corporate governance
- Illegal acts or illegal profits are generally not covered under D&O insurance.
What Types of Coverages Are Available?
D&O policies apply to three insuring clauses:
- Side-A: non-indemnified
- Side-B: indemnified
- Side-C: entity securities coverage
Side-A covers individual directors and officers when not indemnified by the entity as a result of state law or financial capability. Some exclusions apply; if an entity refuses to pay the legal defense/loss of a director or officer, or if a bankruptcy court issues an order preventing such indemnification
Side-B provides coverage for the corporation (organizations) when it indemnifies the directors and officers (corporate reimbursement)
Side-C provides coverage to the corporation (organizations) itself for securities claims brought against it
Alternatively, consider extensive coverage for individual directors and officers under a Broad Form Side-A “Difference in Conditions” (DIC) policy to provide excess non-indemnified coverage, but also to fill the gaps in coverage, it springs into action where your traditional policy does not, protecting individual directors and officers in the face of bankruptcy courts deeming the D&O policy part of the bankruptcy estate and otherwise fully protects personal assets of individual directors and officers.
How Important Is D&O Insurance?
Although there are misconceptions that D&O claims are only meant for public companies, surveys show that public, private, and non-profit companies all face D&O litigation risks. The average total cost of D&O lawsuits to companies can be hundreds of thousands of dollars, considering judgments, settlements, fines and legal fees. Without sufficient coverage, this could be financially devastating to a medical practice, as well as its directors and officers.
Entities with corporate boards or advisory committees, including non-profit organizations should consider investing in D&O insurance. To be personally sued over their management of company affairs, a company does not need to have revenues in the tens of millions of dollars. In all actuality smaller businesses with fewer assets may need the protection just as much as large for the sake of directors and officers.