What is Directors & Officers Insurance?

Directors and officers (D&O) liability insurance covers directors and officers if they are sued while running a business or a charitable group. The insurance covers the costs and damages (awards and settlements) resulting from legal action, accusations and complaints brought against members of an organization’s board of directors or officers.

Anyone who serves as a director, officer, board member, or other high ranking person in an organization should insist on having D&O insurance. Typically, D&O insurance is paid for by the company.

Understanding Directors and Officers Liability Insurance (D&O)

Anyone who serves as a director or officer of a for-profit or nonprofit organization is covered by D&O insurance. A Directors & Office insurance coverage protects against lawsuits where the person is named as a defendant.

A directors and officer’s policy will defend the person in a lawsuit brought against the company.

D&O insurance claims are paid to directors and officers of a company or industry for damages or compensation of litigation costs if legal issues are brought against them. This type of coverage can also include judicial and legislative inquiries, as well as trial defense costs.

Directors and officials are frequently subjected to both civil or criminal proceedings any time the company or organization is sued.

Types of Directors and Officers (D&O) Liability Insurance

A typical D&O insurance policy includes three different forms of insurance agreements. They are generally known as Side A, Side B, and Side C.

  • Side A – When the firm cannot compensate the individuals, the directors and officers are protected.
  • Side B – When the firm grants indemnity, the coverage covers the losses of directors and officers. In this situation, the policy will cover the company’s legal expenses. The corporation is insured under Side B coverage while its corporate assets are at danger.
  • Side C – This, also called as “entity coverage,” removes coverage allocation conflicts when both the directors and officers as well as the insured organization are listed as co-defendants in a securities action.

A wide range of claims against a firm have the potential to hold company leaders accountable—and liable. Business leaders can be held liable if their firm fails to follow standards and provide a safe and secure work environment.

Furthermore, if a corporation is held liable for damages as a result of organizations and negligence, directors and officers may be held accountable as well. The following are examples of claims that may be made against individual company leaders as well as the organization as a whole:

  • Shareholder lawsuits concerning the performance of a firm or stock
  • Suits brought by creditors or investors asserting mismanagement or breach of fiduciary duties
  • Prospectus misrepresentation
  • Decisions that surpass a corporate officer’s power.
  • Employment practices and human resource challenges

What is not included?

Standard exclusions in a D&O policy often include the following:

  • Fraud
  • Profitability for oneself
  • Profit accounting and other improper compensation exclusions
  • Personal injury/property damage

Process for Acquiring Directors and Officers (D&O) Liability Insurance

In practice, the D&O insurance process is simple. Contact your insurance broker. Your broker will collect information about your company and shop around for the best coverage for your company.

Directors and Officer’s insurance is a “surplus lines” type of insurance, and there are several different carriers who offer these types of policies. In many cases, you might be purchasing from a carrier who is outside your state.

Filing a Claim under Directors and Officer’s Insurance

It all starts when a manager is accused of failing to perform his or her duties. Employment negligence, reporting errors, erroneous disclosures, bankruptcies, and regulatory infractions are all prevalent risk situations. As a result, some litigants decide to file a lawsuit against the manager.

After notifying the manager and legal/risk management departments of the complaint, give the details of the lawsuit to your broker/insurer.

If your claim is approved, the insurer will fund the costs of defense. If the claim is accepted and the lawsuit is lost, the insurer covers the litigation costs as well as the financial losses.

The extra value of protecting company leaders

Aside from covering for claims against corporate leadership, obtaining directors and officers liability insurance has various other advantages, including a firm’s capacity to:

  • Keep strong leaders in place – Many prospective directors and officers will be afraid to support your company if they are exposed to financial obligations. This is something that D&O liability insurance may help with
  • Encourage business – Before making an investment, venture capital and private equity firms frequently require organizations to have D&O coverage.

What Is D&O Insurance Covered For? 

When the insured is held liable, D&O insurance often covers legal bills, settlements, and monetary losses. Violation of duty of care, failing to comply with legislation, lack of corporate governance, creditor claims, and reporting errors are all common issues covered.