Directors and Officers Liability Insurance: Essential Protection for Business Leadership

Recently, a small business operator decided it was appropriate to establish a board of directors for his company. After multiple years of expansion, the owner believed a board could help guide the company's direction. Upon discovering this, several individuals mentioned that it was wise to obtain directors and officers liability coverage.

Directors, officers, and organizations are held responsible to investors and shareholders for the financial oversight of the company they serve. They make strategic decisions for business growth. Sometimes the choices they make can negatively affect the business, which can expose them to lawsuit risks. This coverage can be essential to your business's risk management strategy.

What is Covered by Directors and Officers Liability Insurance?

Directors and officers liability coverage (frequently abbreviated to D&O Insurance) shields individuals, their spouses, and their personal assets from losses when claims are filed by employees, competitors, investors, customers, or vendors for actual OR alleged misconduct while they oversee a company or organization, such as:

• Breach of fiduciary duty
• Lack of corporate governance
• Misuse of company funds
• Failure to comply with workplace law
• Accusations of reporting errors

This liability coverage type pays legal expenses and other defense costs. It also typically applies to the company or organization.

Directors and officers protection might also be combined with business insurance called employment practices liability insurance (EPLI) as part of a management liability insurance policy. This coverage protects against claims filed by employees for allegations like discrimination and wrongful termination. Combining the two might be more economical protection for a business.

D&O Insurance includes several components called sides, each applying to different aspects.

Side A Coverage: This shields directors and officers of a company when the company cannot indemnify them.

Side B Coverage: Also known as "entity protection," this protects the company's balance sheet and reimburses the organization when it indemnifies the directors and officers.

Side C Coverage: When directors, officers, and the company are named in a lawsuit, this prevents coverage disputes among the 3—entitling them all to protection.

What is Excluded from D&O Insurance?

A D&O policy will not pay defense costs or settlements when the individual is found guilty of:

• Fraud and criminal activity
• Willfully lying or providing inaccurate information
• Pending or prior litigation
• Bodily injury or property damage

A director and/or officer on the same board cannot sue another director and officer and receive any payout from the insurance carrier.

Noted Benefits of Obtaining Directors and Officers Insurance

There are several additional reasons your business might want to invest in D&O insurance protection:

Investment Capital: When you are a new venture seeking investment capital or launching another funding round, you will frequently be required to secure directors and officers coverage to protect investor assets. When you already have the policy established, it can help attract venture capitalists because they know they'll be protected.

Attracts Leadership: When potential board members know a directors and officers policy exists, they will be more willing to serve because they know they and their personal assets will not be held responsible for financial losses. Plus, the insured parties will be reimbursed for any attorney fees or court settlements.

How is it Different From Errors and Omissions Insurance?

Many business operators confuse directors and officers insurance with errors and omissions liability protection—sometimes called professional liability coverage. E&O protects against errors and omissions related to products and services issues. Directors and officers liability coverage provides protection for performance-related issues and issues related to fiduciary responsibility.

Who Needs Directors and Officers Coverage?

What companies require D&O liability protection?

• Private companies
• Public companies
• Non-profit organizations
• Financial Institutions

Any lawsuit filed against the company and its officers can be time-consuming plus financially devastating. Directors & officers liability coverage will provide protection for the directors, officers, managers, and employees for suits filed alleging they were not prudent and caused financial harm as a result.

So what can directors or officers be sued for?

• In the absence or perceived absence of loss due to due diligence
• Misuse of company funds
• Fraud and criminal activity
• Theft of intellectual property
• Poaching customers from another business
• Claims that you lured away key employees
• Failure to comply with regulations
• A company's financial loss
• The decision to sell or merge a company
• Financial loss of investors due to bankruptcy

Whether that is accurate or not, your company must defend this action at company expense. Purchasing a D&O Insurance Policy from an insurance agent might help in limiting your company's exposure and reducing the financial risk associated with these lawsuit types.

How is Public Official Liability Different?

Most public and private officers and directors policies are written as D&O policies. But there is another type to consider—POL or public official liability. This policy is typically written for municipalities but can also be written for other government agencies. It might be used for many public organizations as long as the organization can be considered "an entity." Both policies protect against wrongful conduct, but wording within the policies might differ significantly.

The definitions of "wrongful conduct" are specifically identified within the D&O policy, but not so in the POL. You must also note the terminology within the policies, such as "any act" or "negligent act." As a general rule, the more restrictive definition, the smaller the premium which also equals more restrictive claim payments. The reverse is also accurate. The broader definition within a policy, the more premium will be paid, to equal larger claim payments. When you have questions regarding your coverage needs, please speak with your agent or one of ours.

How Much Does Directors And Officers Insurance Cost?

D&O Insurance costs vary depending on several factors:

• The business or organization size
• How many board members/executives will be on the policy
• The sector the business operates in (such as finance, oil, energy, etc.)
• The amount of revenue the business handles annually

The median cost for a small business might be approximately $1,000–2,000 annually. A large organization can pay tens of thousands for protection to safeguard their business.

Get a Free D&O Insurance Quote

As your business expands, don't let the risk exposure expand with it. One of our licensed insurance agents will gladly help you identify the appropriate insurance carrier to protect your business. Whether you need an entire management liability policy or simply D&O coverage, Harper has you covered! Enter your email in the form above and one of our specialists will connect with you to get you a free quote.