Directors & Officers (D&O) Insurance

Directors & Officers (D&O) Insurance

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What Directors and Officers Insurance Is All About:

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An investor sues a company executive for breach of fiduciary duties. Customers allege a pattern of misconduct that your board of directors failed to detect. An executive claims she was wrongly let go due to actions by certain other executives.

These types of claims could be brought against your business at any time, and end up costing you hundreds of thousands of dollars.

Let us introduce you to Directors and Officers Insurance coverage, the most important line of defense in a business's Management Liability insurance program. This insurance is broadly written coverage for 'Wrongful Acts' alleged to have been committed by the leaders of an organization. This is insurance which can protect the personal assets of an individual and allow them the decision making freedom more conducive to a growing and ambitious organization.

Read on to understand if Directors and Officers Insurance is right for your business.

What Is Directors and Officers Insurance?

Directors and Officers Insurance covers management and executives for claims made against them while they are serving on a board of directors and/or as an officer of an organization. In layman’s terms, Directors and Officers Insurance covers claims resulting from decisions and actions taken by company managers as part of their job duties. An organization’s officers typically include key executives and managers, but not all employees. Policies cover defense costs and damages arising out of wrongful act allegations and lawsuits brought against an organization’s directors and/or officers.

The United States is the world’s largest Directors and Officers Insurance market, and the sources of insurance claims on these policies are ever expanding. The open ended indemnification terms written into this insurance can help to protect management from unforseen situations which cause financial injury to others. Third party claims are most common when a company declares bankruptcy, and claimants try to hold managers liable for the company’s failure in an attempt to collect investments or debts. The most expensive claims, however, are usually made by regulators and shareholder groups.

Another frequent source of a management liability claims comes from accusations of wrongful employment practices. This can include employee complaints of discrimination, wrongful termination, hostile workplace conditions, and many more. Insurance for this exposure is most often provided as a separate Employment Practices Liability Insurance coverage along with a Directors and Officers Insurance policy.

Directors and Officers Insurance coverage is necessary to enable managers to make decisions without having to worry about personal liability. Directors and Officers coverage allows managers to settle claims quickly and discreetly. Even if an insurer ultimately doesn't cover a loss, Directors and Officers Insurance can still be useful because it will cover the defense costs for the claim.

Do I Need Directors and Officers Insurance?

It’s true that major publicly traded companies face the most risk when it comes to claims against higher-ups. In fact, it’s standard for large multinational companies to acquire this type of coverage as an indispensable part of their risk management strategy. However, all kinds of other organizations should be insured as well.

These insurance claims are increasingly common for both public and private companies, as well as nonprofits. In a recent Towers Watson survey, 27% of privately owned companies reported claims within the last ten years. Organizations and their management teams are susceptible to a wide range of claimants, including shareholders, customers, employees, competitors, vendors, and government entities.

If you think your General Liability Policy offers the coverage you need, think again: General Liability and Umbrella Insurance don’t cover claims concerning management decisions.

Managers make mistakes and are often held liable for them. Management and executives have to make tough decisions, often based off little information, that can have a huge impact on the business and outside world. No matter how careful or experienced they are, any manager’s actions and decisions can result in losses for an organization or a third party, which can lead to costly litigation. D&O Insurance makes the risk that comes with managerial decision-making manageable and transparent, ensuring that a company’s management has room to make decisions.

A comprehensive D&O policy is often actually a necessary recruitment tool to attract and retain top talent to a board seat. This is especially the case for nonprofits. Directors and Officers Insurance for Nonprofits is an important addition due to the difficult decisions required of a nonprofit director. It is also often broadly written to include all members of the nonprofit organization.

Executives and managers themselves are increasingly inquiring about coverage, seeking additional assurances beyond corporate indemnification. Additionally, some outside investors, like venture capitalists, will require D&O Insurance, viewing the coverage as a way to protect their investment. As claims related to regulatory actions have become more common, many organizations now consider personal liability coverage as one of the most important aspects of their D&O program.

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What Does Directors and Officers Insurance Cover?

At a High Level...

Coverage is granted on a claims-made basis, meaning claims are only covered if they are made while the policy is in effect or within a contractually agreed extended reporting period, which can extend up to 72 months. Typically, policies have an agreed upon, often unlimited, retroactive period as well, which covers claims for wrongful acts that took place before the policy began.

Getting Into the Details...

Here are some examples of Directors & Officers Insurance claims:

Type of Claim Description Example
Theft of trade secrets A competitor holds a member of your management team liable after you've allegedly obtained trade secrets illegally. Your company hired three employees from this competitor, and they shared proprietary information when they came on board. The case is likely to result in a settlement, and could also incur significant defense costs.
Misrepresentation This type of claim may be made when investors feel that they were given information that misled them, and suffered a loss because of it. An officer at your company gave a presentation to a potential investor that included future products that would be launched over the next year. A year later, the expected products still haven't gone to market, and the value of the initial investment has declined. The investor can sue directors and officers of your organization, seeking compensatory and punitive damages.
Wrongful acts Actions committed by managers in the scope of their managerial duties could be deemed "wrongful" by stakeholders if they resulted in a loss. Your board of directors declines an offer to buy the company. Stakeholders believe this wasn't the right decision, and sue.
Criminal proceedings Many D&O insurance policies cover costs for managers generated by criminal proceedings and investigations by regulators or criminal prosecutors. Executives, along with your business, could be named in a price-fixing scheme. D&O would cover defense, judgement and settlement costs for innocent parties.

You'll Know It's the Right Policy If It Covers:

  • The organization’s assets
  • Personal assets of its directors and officers
  • Personal assets of its directors’ and officers’ along with their partner
  • In the case of a deceased director or officer, their estate Personal assets of all current, future and past management of a company and its subsidiaries, including non-executive directors

What Does Directors and Officers Insurance Not Cover?

D&O Insurance policies aren’t “get out of jail free” cards for managers. In fact, intentional illegal acts are not covered under these policies. It’s important to note, however, that innocent individuals will remain fully covered if they are co-defendants with a colleague who committed intentional or fraudulent acts.

Directors and Officers Insurance does not cover:

  • Fraud
  • Illegal Remuneration
  • Personal Profit
  • Intentional Non-Compliant Acts
  • Property Damage
  • Bodily Harm Claims Made Under a Previous Policy
  • Legal Action Already Taken When the Policy Began

What Are the Limits on Directors and Officers Insurance?

These policies have a certain maximum limit of coverage, which varies greatly. Smaller companies, for example, may only purchase a limit of up to $2 million, while larger corporations may purchase cover up to $300 million or higher.

The policy limit is an annual aggregate, which means that there is only one single limit for all the claims against the insured during one policy year. All defense and other costs are part of this limit.

How Much Does Directors and Officers Insurance Cost?

The premium for D&O Insurance is calculated based on the estimated claims frequency and severity. There are a number of risk factors that affect pricing, including:

  • The size of the company
  • Domestic and international activity
  • History of past claims
  • Industry sector
  • Mergers and acquisitions activity
  • Professional backgrounds
  • Profit
  • Debts

Many insurance companies now offer small business coverage starting as low as $400 per year for nonprofits and $3,000 per year for profit seeking corporations - a small price to pay for protection against potentially costly settlements. While small businesses are considered low-risk by underwriters, publicly traded companies are usually considered high-risk and could pay $10,000 to $30,000 per million in annual premium.

$46
Minimum monthly cost
for low risk businesses
$388
Median monthly cost
for average size businesses
$506
Average monthly cost
for average size businesses

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