Today’s business climate involves much more accountability and transparency, meaning the actions of your executives are under greater scrutiny. If employees, shareholders, creditors, or other third parties file suit against your business for alleged wrongdoing, your directors and officers may be held personally liable. In order to provide protection for your management team, consider purchasing coverage with Directors and Officers Liability Insurance.

What is Directors and Officers Liability Insurance?

Directors & Officers (D&O) Liability Insurance provides protection for the personal liability of directors and officers of a company while they are performing their roles as directors and officers. It is purchased by the company for the benefit of their directors and officers to protect them if they are accused of making management errors. D&O Insurance is an important tool that assists your company in attracting and retaining talented officers and directors, as many executives will not work for a company that puts their personal assets at risk.

Example:

• An administrative assistant to your VP of Sales was recently fired from the company. She files a wrongful termination suit against your company and your VP of Sales, alleging that she was the victim of sexual harassment and was fired for spurning the sexual advances of your VP. Directors and Officers Liability Insurance would provide coverage in the lawsuit.

Directors and Officers Liability Insurance is payable either to the directors and officers of a company or to the company itself as a reimbursement for covering the losses of its directors and officers. D&O Insurance may also advance the payment of legal defense costs. It is meant to cover losses suffered by officers and directors as a result of legal action brought against them for alleged wrongdoing in their roles as officers and directors.

Many management teams mistakenly believe that the company’s general liability insurance will cover their liability. However, commercial general liability insurance only covers the company itself. It does not provide protection against lawsuits that name them personally and also does not cover management mistakes. Lawsuits can be very expensive to defend even when they are without merit, so having D&O Insurance can help protect the personal assets of corporate directors and officers.

Coverage from D&O Insurance can also cover defense costs from criminal and regulatory investigations or trials. Often, a government or regulatory agency may bring both criminal and civil prosecutions against an officer or director. Although D&O Insurance does not cover intentional criminal acts, it will pay for the criminal defense of a covered person until that person has been found guilty.

Who needs Directors and Officers Liability Insurance?

A common misconception is that D&O Insurance is only applicable for large corporations who have outside shareholders. However, privately owned companies are just as much at risk from D&O lawsuits. Plaintiffs in D&O claims can include employees, customers, vendors, competitors, regulators, creditors and others. Any of these third parties could target your board members or management team with lawsuits, even if your company is privately held. In fact, recent estimates have shown that one in four private companies have had D&O claims filed against them in the last decade. And with the average cost of D&O lawsuits hitting nearly $700,000, smaller companies may be unable to shoulder the costs of such claims, making Directors and Officers Liability Insurance all the more important for these businesses.

D&O Insurance is not only important to protect the financial viability of a business, but it may also serve as an important tool to attract senior-level talent. Many seasoned executives will look to make sure a company they are joining has D&O Insurance in place, in order to protect their own personal assets and to ensure that they have the freedom to make difficult management decisions without fear of putting their own finances at risk.

Indemnification

Most company articles of incorporation or articles of organization provide for the presumptive indemnification of officers and directors. Indemnification is an agreement to compensate officers or directors for any financial losses or damages they personally suffer as a result of actions they took while acting in their role of officer or director.

Most indemnification agreements are unlimited up to the maximum amount permitted by law, which means the company promises to cover all of an officer or director’s costs and losses. However, practically speaking, this indemnification is limited by the financial resources of the company.

Directors and Officers Liability Insurance is purchased in addition to corporate indemnification of directors and officers. Many officers and directors want a company to provide both indemnification and D&O Insurance.

What does Directors and Officers Liability Insurance cover?

Directors and Officers Liability Insurance is meant to protect your business and executive team from lawsuits where your directors and officers are personally named. Every insurer will typically customize D&O policies to meet the needs of each individual business providing coverage for claims made. While there is no industry-standard policy form, most D&O policies share in common three important coverages: sides A, B, and C.

• Side A provides coverage for non-indemnified directors and officers. It covers individual directors and officers when they are not indemnified by the corporation as a result of state law, or if the company does not have the financial resources to indemnify them.
• Side B provides coverage for the corporation. It reimburses the corporation when it indemnifies the officers and directors.
• Side C also provides coverage for the corporation. For public companies, it protects the corporation against securities claims brought against the company. For private companies, it covers claims that name both the company and its officers and directors that are not covered by general liability insurance.

Directors and Officers coverage can be broadened through a number of endorsements. For protection against employment-related issues like discrimination or harassment, employment practices liability (EPL) coverage is often added as an endorsement. Another common endorsement is fiduciary liability coverage, which would protect your firm’s fiduciaries against claims of mismanagement of your company’s benefit plans.

Types of Claims

Directors and Officers Liability Insurance protects against a wide variety of claim types. This insurance will also pay to defend against frivolous claims without merit. The following are some common claims that D&O Insurance covers:

Shareholder claims. Shareholders have a vested interested in making sure the company they are investing in is being run effectively. If they are displeased with management decisions or company outcomes, they may file suit. These claims can include:

• Damage to the corporation in breach of their legal duty
• Breach of fiduciary duty resulting in financial losses or bankruptcy
• Failure to follow the organization’s bylaws or lack of corporate governance
• Misuse of company funds or mixing personal and business assets
• Innocent errors in judgment by executives may cause claims
• Failure to disclose conflicts of interest

Employee claims. Employee lawsuits are the most common claims against directors and officers. Employees may be dissatisfied with the way they have been treated by the company and decide to file suit. These claims can include:

• Failure to comply with workplace laws
• Discrimination
• Wrongful termination
• Invasion of privacy
• Infliction of emotional distress
• Sexual harassment

Competitor claims. Competitors of your business may claim that your directors or officers were involved in wrongful actions that injured their business in some way. These claims can include:

• Personal injury: defamation, libel, and slander
• Publisher’s liability: plagiarism and copyright infringement
• Theft of intellectual property or trade secrets
• Anti-competitive behavior

Customer/vendor claims. If a client or a vendor believes a company failed to perform or uphold their obligations in any way, they may take legal action. Common claims can include:

• Misrepresentation of company assets
• Failures in services or product
• Discrimination
• Contract disputes

Creditor claims. Like shareholders, creditors have a vested interest in how a debtor is performing financially. If a business is unable to repay its debts, creditors may file suit. These claims can include:

• Negligence
• Misconduct
• Breach of fiduciary duty
• Breach of duty of care

Regulator claims. Government and regulatory bodies ensure that companies abide by established laws and regulations. If a company fails to comply, regulators may step in and file suit against the business and its directors and officers.

What are the key exclusions to Directors and Officers Liability Insurance?

There are a few important exclusions to Directors & Officers Insurance, including:

• Illegal acts and fraud. D&O policies will not cover intentional illegal or fraudulent acts. The insurer will cover criminal defense costs, but if the defendant is found guilty, the insurer reserves the right to to recoup the expenses they have incurred.
• Insured vs insured lawsuits. Lawsuits between two parties who are both insured by the same D&O Insurance policy are excluded. For example, one director may sue the rest of the directors of the company. This clause exists in order to prevent collusion, where two parties collude in order to collect from the insurance company. It also is meant to keep the insurance company out of company infighting, which can be difficult for an insurer to resolve.
• Prior acts and known circumstances. If an incident leading to a claim happened before your D&O policy began, and your company could have foreseen that a claim could result, your insurer would exclude coverage.
• Prior or pending litigation. If a case is already in progress or pending when you obtain D&O Insurance, it will not be covered.
• Contractual liability. Many D&O policies exclude claims that are related to breach of a contract that your company entered into with another party.

How much does Directors and Officers Insurance cost?

AdvisorSmith found the average cost of Directors and Officers Liability Insurance for small businesses was $1,046 per year. This cost survey included small businesses with under $500K in revenue in 27 industries, including retail, wholesale, manufacturing, consultants, contractors, and more. Premiums are based upon liability coverage of $1 million.

It’s important to note, however, that no two D&O policies are the same, and every business has different exposures to D&O risk. Because of this, pricing for D&O Insurance can vary widely not only by the insurer but also by the type of company seeking coverage. Pricing can vary from a few hundred dollars a year per $1 million of coverage for small companies to $10,000 or more per $1 million of coverage for larger organizations.

Factors affecting the pricing of D&O insurance premiums include:

• Company size
• Industry
• Claims history
• Mergers & acquisitions history
• Professional background of directors and officers
• Company profits
• Company debts

In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable insurance carrier. Below we’ve highlighted a few of our trusted partners who offer Directors and Officers Liability Insurance:

Provider	Directors and Officers Liability	Professional Liability	General Liability
CoverageSmith	??	??	??
CoverWallet	??	??	??
Embroker	??	??	??
Hiscox	??	??	??

What are other key considerations for Directors and Officers Liability Insurance?

Severability

Many D&O policies include an exclusion severability provision, which, in effect, protects directors and officers who have done nothing wrong when other directors or officers are charged with wrongdoing that would typically trigger an exclusion in your D&O policy. If a suit is brought against your board of directors for illegal acts or fraud, when only one member of the board is at fault, the other board members will still be covered by your D&O policy, while the offending board member would be excluded from coverage.

Shrinking Limits of Insurance

Directors and Officers Liability Insurance features “shrinking limits” of insurance, which means that legal defense costs are included within the limits of insurance. This is in contrast to commercial general liability, where legal defense costs are not counted against the policy limits. The reason for the “shrinking limits” is that more than half of D&O claims close out with zero indemnity, which means the legal costs account for a significant portion of the claims.

Claims-made Policy

Directors and Officers Liability Insurance policies are written on a claims-made basis. These policies will only cover claims if the claims are submitted while the policy is active. This differs from other liability insurance policies which are typically occurrence policies, such as commercial general liability insurance. If your claims-made policy is not active, you do not have any coverage for past actions even if the actions causing the claim were committed while the policy was active.

Example:

• Your company has a claims-made D&O policy that expires in December 2019, and the policy is not renewed or replaced. The directors of the company approve a business decision to purchase capital equipment in November 2019. In January 2020, the company discovers the purchase was a poor decision and leads to financial losses. Shareholders sue the directors for neglecting their fiduciary duty. Since the insurance coverage is no longer active, the directors do not have coverage for the lawsuit, even though the decision was made while the insurance was active.

Most D&O Insurance has an unlimited retroactive period, which means it covers claims for wrongful acts that took place before the policy began.

Representations and Rescission

D&O Insurance is issued based on statements given by your company. These statements are considered representations, which means that you promise the statements are true. If, at the time of a claim, any of the representations are found to be false, it can limit your coverage or void the insurance contract altogether, which is called rescission. It is important to ensure your representations are correct when applying for D&O Insurance. Some insurers offer non-rescindable policies, usually for a higher premium.

Self-insured Retention

Many D&O policies are written with self-insured retention (SIR), rather than a deductible. A self-insured retention is an amount that must be paid by the insured, prior to coverage kicking in from the insurer. With an SIR, companies may be able to benefit from lower premiums than on a deductible-based policy, in addition to being able to manage claims on their own, up to the SIR. By dealing with smaller claims without an insurer, companies can maintain a cleaner claims history, which can ultimately help them look less risky to insurers.

Final Word

The directors and officers in your organization are often tasked with making critical decisions that may impact the financial viability and trajectory of your business. If mistakes are made or executives steer the company in the wrong direction, your directors and officers may be held personally liable for any losses. Whether you are a large, multi-national corporation or a small, privately held business, D&O risk is a real threat. As D&O claims become more and more common, it’s important to make sure your organization obtains comprehensive protection not only for your business, but also for the personal liabilities of your executive team. Directors and Officers Liability Insurance can help provide that coverage, allowing your directors and officers to continue to run the business, knowing they will be financially protected in any situation.