Directors and Officers Liability Insurance, also known as D&O coverage, is a type of insurance policy designed to cover certain actions taken by a company’s board of directors and executive officers. Claims can arise in a variety of situations, whenever directors and officers breach the duty of care that they owe to an organization’s shareholders, customers and employees. A D&O policy will indemnify the insured for any lawsuits or claims made against directors and officers while they serve on the board or as officers. These policies are an integral part of a comprehensive risk management strategy.
How Do D&O Policies Work?
D&O insurance, explained differently, is a way for organizations to manage risk while attracting talent. D&O insurance policies can be purchased by any number of organizations, from large public corporations to closely-held family businesses, educational institutions, and nonprofit organizations. Corporations and organizations usually purchase the policy for the benefit of its officers and directors. This helps to attract and retain directors and officers, as many candidates would not be willing to step into these roles if they were not indemnified. This is particularly true for outside directors of a company, who would likely not choose to serve on a board of directors if it meant putting their own assets at risk.
D&O claims can arise from a variety of situations, depending on the type of organization that has purchased the policy. This may include negligence, shareholder oppression, anti-trust actions, misrepresentations, errors or omissions. For large, publicly traded companies, claims most often arise when shareholders sue after financial difficulties. For private companies, claims may come from competitors in an antitrust action or from customers for deceptive business practices. Nonprofits utilize D&O policies if they are sued for their employment practices by employees or job applicants. Please visit our blog for more examples of Directors and Officer’s claims.
Because the pool of potential claimants is vast — covering shareholders, employees, customers, competitors and others — the range of possible claims that could be covered by a D&O policy is similarly large. A claim may occur if an executive acts beyond the scope of his authority, for example, or if the company’s executives are negligent in filing required paperwork. A claim could be filed if a company misrepresents itself in a prospectus, or if it fails to comply with regulations or laws. Claims may also arise if a company declares bankruptcy, as creditors and other claimants may try to hold the business’ managers responsible for the debts owed. Importantly, fraudulent, criminal or intentionally illegal acts are usually not covered by D&O insurance policies.
Typically, D&O insurance has three separate insuring clauses. Side-A provides coverage for individual officers and directors in situations where the organization is not indemnifying them (usually because of state law or for financial reasons). Side-B coverage reimburses companies who have indemnified its directors and officers (i.e., after the company has paid the costs for the directors and officers in a lawsuit, the insurance company pays the company).
Side-C covers the entity itself; for public companies, this protection is limited to securities claims. When choosing D&O insurance, an organization can decide to purchase all or some of these insuring clauses, and to purchase varying levels of coverage.
Why Purchase D&O Insurance?
D&O insurance is an essential part of any organization’s risk management strategy. Regardless of the size of the company, or whether it is for-profit, not-for-profit, or nonprofit, every organization has potential exposure to D&O claims. No matter how good their business judgment may be, any manager’s decision may still result in a loss for the company. This can result in liability for the director or officer, with the potential for costly litigation and significant awards or judgments.
D&O insurance allows directors and officers to make business decisions by giving them the financial security of knowing that any claims based on those decisions will be covered. It is simply good corporate governance for an organization to have a D&O policy in place to ensure that its officers and directors have the freedom to make appropriate business decisions without worrying that a bad judgment call will result in severe personal financial consequences. These policies also help organizations to settle claims quickly and discreetly, and can cover the high costs of legal fees for lawsuits.
Contact BBG for More Information on D&O Insurance
If you believe that your organization could benefit from a D&O insurance policy, contact The Business Benefits Group today by sending a message online or by giving us a call to learn more about our business insurance services and the various types of coverage policies available.