As a consulting company, your team of directors and officers have major responsibilities and make decisions that impact employees, clients, investors, creditors, and others. If your directors or officers are accused of committing any wrongful acts or mistakes in their role, they could be held personally liable. Since executives are unlikely to want to work for a company that puts their personal assets at risk, Directors and Officers Liability Insurance is a key coverage for consulting companies to consider. This coverage provides financial protection for your directors and officers if they are personally named in a lawsuit—an essential coverage sought after by many seasoned executives.

Lawsuits that personally name directors and officers are common, even among smaller and privately owned companies, and they can be very expensive to defend, even if your company has done nothing wrong. Directors and Officers Liability Insurance can help ensure that you are able to find and retain excellent directors and officers who are able to make important decisions for your company without fear that their personal assets will be at risk.

What is Directors and Officers Liability Insurance for consultants?

Directors and Officers (D&O) Liability Insurance protects your consulting company’s executives from lawsuits in which they might be held personally liable. When running a consulting firm, executives often have to make important decisions based on a complex array of factors. These decisions can affect employees, clients, competitors, vendors, and others. If a decision has unexpected consequences that cause financial losses, the company could be sued and your directors and officers could be personally named in the lawsuit.

Example:

• Your management consulting company poaches a senior executive from a prominent competitor. The competitor sues your firm and your board of directors, alleging that their former employee used knowledge of the competitor’s clients inappropriately. Your D&O policy would provide funds to defend the case.

In today’s business climate, corporate accountability and governance are increasingly being brought into the public spotlight, meaning your directors and officers are facing higher risk exposure. While it’s clear that large corporations face increased scrutiny from shareholders and investors, privately owned companies are just as much at risk. Recent estimates have shown that one in four privately held businesses have faced a Directors and Officers claim in the last decade. Employees are a common source of lawsuits against directors and officers, and you could also be sued by a number of third parties, including creditors, clients, competitors, or regulators. Directors and Officers Liability Insurance can help protect your executive team, as well as provide financial support for your company in defending these third-party lawsuits.

Why do consultants need Directors and Officers Liability Insurance?

The claims covered by Directors and Officers Liability Insurance are common, and litigation for these claims can be drawn out and expensive. With the average costs of D&O lawsuits approaching $700,000, one claim could easily strain the financial resources of your consulting firm and put the personal assets of your directors and officers at risk. In order to retain and attract talented executives, your company will need to provide them with the freedom to make hard decisions without fear of being held personally liable for any resultant financial losses. Directors and Officers Liability Insurance can provide your consulting firm’s executives with this important protection.

Although highly publicized examples of D&O claims are typically cases involving publicly traded companies, these types of claims are also very common for smaller, privately owned businesses. When you operate a consulting business, there is always a risk that you could be sued for alleged wrongdoing. Smaller companies have many of the same risks as larger companies but may not have HR or legal departments or comprehensive employee training to help them avoid potential lawsuits. Defending a D&O lawsuit can be very expensive, and other types of liability insurance typically don’t cover the types of claims that D&O policies cover.

Example:

• Your consulting firm wins a large multi-million dollar contract with a Fortune 500 company. In order to close the deal, the president of your firm vastly exaggerated the size and resources of your company. When the project begins, it becomes clear that your firm will likely be unable to serve the client appropriately. Word gets out about the bad deal, and your client’s share price sinks. Your client files suit against your firm and your company president for misrepresentation.

What is indemnification?

Companies typically offer indemnification to their directors and officers, which means that the company agrees to compensate executives for any personal financial losses they suffer while defending against a D&O lawsuit. Indemnification helps to attract talented directors and officers and provides them with the added assurance that any decisions they make will be financially supported by their company in the case of a claim. In fact, many experienced executives will look specifically for a company to provide both indemnification and D&O Insurance.

Directors and Officers Liability Insurance can work in tandem with indemnification by reimbursing costs that a company incurs under indemnity agreements, up to the limit of insurance. For smaller consulting firms, this is especially important, as indemnification can only go so far. In practice, indemnification is limited by a company’s financial resources. D&O policies can step in to provide funds in situations where a company lacks the ability to pay for defense costs or where indemnification provisions are lacking in coverage.

What does Directors and Officers Liability Insurance cover?

Directors and Officers Liability Insurance is designed to protect your management team in the case of lawsuits in which they are personally named as defendants. Directors and Officers Liability policies typically include three types of coverage, known as sides A, B, and C.

• Side A provides coverage for directors and officers when they are not indemnified. If the company cannot indemnify directors and officers because of state laws or because it lacks the resources, D&O Insurance will step in to directly cover the costs.
• Side B provides coverage for the company. If the company indemnifies its directors and officers, side B coverage will reimburse the company for the costs it incurs defending its directors and officers against D&O claims.
• Side C, also known as entity coverage, insures companies against claims against the company itself. For public companies, Side C coverage is often limited to securities claims brought against the company. For private companies, it covers a broad range of claims that arise from wrongful acts committed by directors, officers, or the company.

Directors and Officers coverage can vary depending on the insurer, and it’s likely that you’ll need to customize your D&O policy to fit the needs of your organization. In many cases, it’s possible to broaden your coverage through endorsements. Employment practices liability (EPL) coverage is frequently added as an endorsement. Employment practices claims make up a significant portion of claims against private companies. Another common endorsement is fiduciary liability coverage, which would protect your firm’s fiduciaries against claims of mismanagement of your company’s benefit plans.

Example:

• A consultant on your staff is fired after making complaints about sexual harassment by her manager, who is one of your company’s executives. She alleges that she was fired in retaliation and sues for wrongful termination, naming the executive in her suit. Your Directors and Officers Insurance policy includes an endorsement for employment practices liability, so it would provide coverage for this case.

What types of claims are common in Directors and Officers Liability Insurance?

There is a wide variety of sources for Directors and Officers Liability Insurance claims.

Employees. Employees are some of the most common sources of claims against directors and officers of private companies. Employee claims could include:

• Wrongful dismissal
• Discrimination
• Failure to address health and safety concerns
• Harassment
• Invasion of privacy
• Infliction of emotional distress

Regulators. Laws and regulations govern how companies are managed. Your business and its executives could be sued by the government or regulatory bodies if there are allegations that your company is not complying with regulations.

Competitors. Your competitors may make allegations of perceived wrongdoing, including:

• Intellectual property violations
• Collusion
• Inappropriate use of trade secrets
• Defamation, libel, or slander
• Plagiarism or copyright infringement
• Anti-competitive behavior

Shareholders. If your company has shareholders, they may sue if they believe you have mismanaged funds, breached fiduciary duty, made errors in judgment, or otherwise failed to act in the best interests of the organization.

Customers. If clients are dissatisfied with your work or felt they were wronged in any way, they may file suit against your firm and its executives. A few common reasons for claims include:

• Discrimination
• Contract disputes
• Dissatisfaction with services rendered
• Misrepresentation

Creditors. A consulting firm’s directors and officers are responsible for ensuring the financial viability of their company. If your firm has taken on debt but is unable to pay it back, your creditors may sue to recover the funds. Common claims from creditors include:

• Negligence
• Breach of fiduciary duty
• Breach of duty of due care
• Deliberate misconduct

What is excluded from Directors and Officers Liability Insurance?

There are a number of common exclusions to Directors and Officers Liability Insurance. They include:

• 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 is entitled to try to recoup costs.
• 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.
• Insured versus insured lawsuits. If a director insured by a D&O policy wants to sue another director who is insured by the same policy, coverage will be excluded. However, there are sometimes exceptions to this rule in cases relating to whistleblowers.
• Contractual liability. Many D&O policies exclude claims that are related to breach of a contract that your company entered into with another party.

Does Directors and Officers Liability Insurance have shrinking limits?

Because legal fees make up a large percentage of the costs involved in Directors and Officers Liability Insurance claims, these policies feature “shrinking limits.” This means that legal expenses count against your overall limit of insurance, reducing the total amount of funds that are available to you.

Is Directors and Officers Liability Insurance a claims-made policy?

Directors and Officers Liability Insurance is a claims-made policy. This means that companies must become aware of a claim during the policy period, and they must notify the insurer while the policy is active as well. The insurer will not provide coverage after the policy lapses, even if the claim took place while the policy was active. Directors and Officers Liability policies may include retrospective coverage, which covers claims based on actions that occurred in the past. These policies often feature a retroactive date, which excludes coverage for actions that happened before this date.

Does Directors and Officers Liability Insurance have a deductible? What is a self-insured retention?

Directors and Officers Liability Insurance typically has self-insured retention (SIR), rather than a deductible. Although these are similar concepts—they are both a portion of the cost of a claim that the insured is responsible for—SIR differs from a deductible because it requires your company to handle the initial costs of a claim until the SIR amount is reached, rather than the insurer billing you for the deductible. After the SIR is paid, the insurer will begin making payments up to the limits of the policy. Insurers may apply SIR requirements differently under the three sides of D&O coverage. Side A, which directly covers directors and officers, typically does not require SIR, while side B has a moderate SIR amount. Side C often has a higher level of SIR.

Final Word

Directors and Officers Liability Insurance can protect your consulting company’s directors and officers from lawsuits for which they could be held personally liable. It’s an important coverage for consulting companies to consider. D&O Insurance can make it easier to attract highly qualified directors and officers if they know their personal assets will be protected in the event of a lawsuit. In addition, this coverage will provide funds if your company is unable to indemnify your directors and officers. The lawsuits covered by D&O policies are more common than many companies realize, and purchasing coverage to protect against these claims can help keep your company stable in the event of an incident.