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What is directors and officers liability insurance?
Directors and officers liability insurance, often called D&O, protects your financial services business from claims that company officials made management errors. This protects the directors and officers of your company from suffering financially in the event of a lawsuit and is an important inducement for talented people to agree to serve as directors or officers of your company.
In the event of a claim, the director or officer will receive reimbursement for any damages or losses. If a lawsuit is filed, legal fees will also be covered.
Example: A client files a lawsuit claiming that they suffered financially because their tax return was not submitted in time and that your company’s officers were negligent in performing their duties. D&O insurance would cover the subsequent lawsuit.
Who needs directors and officers insurance?
Any financial services company with corporate directors and officers may find value in D&O insurance. While many management teams mistakenly believe that the company’s general liability insurance will cover their liability, in fact, general liability insurance only covers the company itself. It does not provide protection against lawsuits that name directors and officers 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.
A common misconception is that D&O Insurance is only applicable for companies who have outside shareholders. However, the most common type of lawsuit against directors and officers comes from dissatisfied employees rather than other shareholders.
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.
Since even frivolous lawsuits can be expensive to defend and resolve, having D&O Insurance can provide protection for the personal assets of your directors and officers.
What does directors and officers insurance cover?
Directors and officers insurance protects against a wide variety of claim types. The most frequent claims for D&O insurance are related to employment issues. Employees may be dissatisfied with the way they have been treated by the company and decide to sue the company and its officers or directors.
The claims that tend to be most expensive are shareholder lawsuits and regulatory actions. However, these types of claims occur much less frequently than other types of claims.
Here is a list of possible claims that D&O insurance covers:
- Shareholder claims
- 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
- Customer/Vendor claims
- Misrepresentation of company assets
- Breach of contract
- Employee claims
- Failure to comply with workplace laws
- Wrongful termination
- Invasion of privacy
- Infliction of emotional distress
- Sexual harassment
- Competitor claims
- Personal injury: defamation, libel, and slander
- Publisher’s liability: plagiarism and copyright infringement
- Theft of intellectual property or trade secrets
- Poaching of competitor’s customers or employees
- Regulator claims
- Failure to comply with regulations
What doesn’t directors and officers insurance cover?
Intentional illegal acts are excluded from coverage under D&O policies. Criminal fraud is also not covered. Although illegal acts are excluded, the insurance company will pay for the cost of criminal defense for officers and directors up until the accused is found guilty.
If the director or officer is found not guilty, the D&O policy will cover the costs of criminal defense. If the accused is found guilty, however, the insurance company reserves to right to recoup the expenses they have incurred in defending the officer or director.
It is also important to ensure your D&O policy includes severability, which will allow coverage to continue for the remainder of the directors and officers if one of the directors or officers is found to have committed a crime. Severability will allow the innocent directors and officers to continue to be insured.
Insured vs insured lawsuits are those between two parties who are both insured by the D&O insurance. 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.
How much does directors and officers insurance cost?
The cost of directors and officers insurance depends on a number of factors, including the industry your business is in, size of business, financial history, and coverage limits. While the range of pricing can vary widely, most small business owners can expect to pay annual premiums between $3,000 to $8,000 for every $1 million in coverage. You can expect the cost of D&O insurance to be greater with larger companies, particularly public companies with higher profiles.