Directors & Officers Liability Coverage
Directors & officers liability coverage, often called D&O, is a type of insurance that protects corporate directors and officers from personal loss in the event they are sued for actual or alleged wrongful acts managing a business and from making managerial decisions that may have adverse financial consequences. It covers legal fees, settlements and defense costs.
FAQs
What does directors & officers liability cover?
A standard D&O policy contains three types of insuring agreements, commonly referred to as Side A, Side B and Side C.
Side A covers claims where the business refuses to or is financially unable to pay for indemnification, like if the company has declared bankruptcy. Under this coverage, the individual officer or director is insured as their personal assets are at risk.
Side B covers the losses of directors and officers when the business does grant indemnification, like reimbursing the company for legal costs. Under this coverage, the business is insured as its corporate assets are at risk.
Side C covers the company’s corporate assets. This is often called “entity coverage” as it extends coverage to the corporate entity.
Directors and officers can be sued for a variety of reasons related to their business roles such as:
- Breach of fiduciary duty
Example: Investors of a company sued its directors and officers after learning that they hired a contractor based on a personal relationship and not the contractor’s qualifications.
- Theft of intellectual property
Example: A senior employee left his job to start his own business. His former employer alleges he took proprietary information with him and files a lawsuit.
- Misrepresentation of business assets
Example: A business negotiated a large contract with a customer. The contract stipulated that the business had certain financial assets in place to meet delivery requirements but the directors and officers understated the company’s revenues and were unable to meet the contract. The customer sues.
- Failure to adhere to by-laws
Example: A homeowners association board allows a new neighbor to paint their house yellow, which is against the association’s by-laws. A member of the HOA sues the board.
- Failure to comply with workplace laws
Example: A female employee was fired but went on to sue the directors and officers of the business for wrongful termination based on gender discrimination.
What doesn’t directors & officers liability cover?
Illegal acts, fraud, criminal offenses and illegal profits are not covered by D&O insurance.
Does my business need directors & officers liability coverage?
Public, private and non-profit businesses are all vulnerable to D&O litigation risk and any business with a corporate board or advisory committee should invest in D&O coverage. Claims against business and their directors and officers are increasingly common. Typically, it is purchased by the business for the benefit of their officers and directors.
Check the facts: A 2016 study by Chubb showed that more than 25% of private companies reported a D&O loss over a three year span.
What does directors & officers liability insurance cost?
D&O coverage cost is based on a variety of factors including the type of business, age of business, history of legal claims, size of business, company revenues and amount of debt. The only way to know exactly what D&O will cost is obtain a quote.