Why You Might Need Directors and Officers Insurance

Recently, a small business owner decided it was time to put a board of directors in place for his company. After several years of growth, the owner felt a board could help focus the company’s direction. Upon learning this, several people mentioned that it was prudent to get directors and officers liability insurance.

Directors, officers, and organizations are held accountable to investors and shareholders for the financial management of the company they work for. They take strategic risks for the growth of the business. Sometimes the choices they make can impact the business negatively, which can put them at risk of being sued. This insurance can be key to your business's risk management plan.

What is Covered by Directors and Officers Liability Insurance?

Directors and officers liability insurance (often shortened to D&O Insurance) protects individuals, their spouses, and their personal assets from losses if there are claims made by employees, competitors, investors, customers, or vendors for actual OR alleged wrongful acts while they manage 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 type of liability insurance covers legal fees and other defense costs. It also typically applies to the company or organization. 

Directors and officers coverage may also be bundled with business insurance called employment practices liability insurance (EPLI) as part of a management liability insurance policy. This insurance covers claims brought against the company by employees for allegations like discrimination and wrongful termination. Bundling the two may be more affordable coverage for a business.

D&O Insurance consists of several elements referred to as sides, each applying to something different. 

• Side A Coverage: This protects directors and officers of a company when the company cannot indemnify them. 
• Side B Coverage: Also known as "entity coverage," this protects the companies 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 eliminates coverage disputes among the 3—entitling them all to coverage.

What is Excluded from D&O Insurance?

A D&O policy will not cover defense costs or settlements if 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 type of payout from the insurance company. 

Noted Benefits of Obtaining Directors and Officers Insurance

There are a few other reasons your business may want to invest in D&O insurance coverage:

• Investment Capital: If you are a new venture and seeking out investment capital or launching another round of funding you will often be required to obtain directors and officers insurance to protect investor's assets. If you already have the policy in place, it can serve to attract venture capitalists because they know they’ll be protected. 
• Attracts Leadership: If potential board members know a directors and officers policy is in place, they will be more likely to serve because they know they and their personal assets will not be held liable for financial losses. Plus, the insured parties will be reimbursed for any legal fees or court settlements.

How is it Different From Errors and Omissions Insurance? 

Many business owners confuse directors and officers insurance with errors and omissions liability coverage—also referred to as professional liability insurance. E&O covers errors and omissions related to products and services issues. Directors and officers liability insurance provides coverage for performance-related issues and issues related to fiduciary responsibility. 

Who Needs Directors and Officers Coverage?

What companies need D&O liability coverage?

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

Any lawsuit brought against the company and its officers can be time-consuming as well as financially devastating. Directors & officers liability insurance will provide coverage for the directors, officers, managers, and employees for suits brought in which it is alleged 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 a loss to due this 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 true or not, your company must defend this action at company expense. Purchasing a D&O Insurance Policy from an insurance agent may aid in limiting your companies’ exposure and reduce the financial risk associated with these types of suits.

How is Public Official Liability Different?

Most public and private officers and directors policies are written as a D&O policy. But there is another type to be considered—POL or public official liability. This policy is usually written for municipalities but can also be written for other government agencies. It may be used for many public organizations as long as the organization can be considered “an entity”. Both policies cover wrongful conduct, but wording within the policies may differ greatly. 

The definitions of “wrongful conduct” are specifically named within the D&O policy, but not so in the POL. You must also take note of 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 equates to more constrictive claim payments. The reverse is also true. The broader definition within a policy, the more premium will be paid, to equal larger claim payments. If you have questions regarding your coverage need, please talk with your agent or one of ours.

How Much Does Directors And Officers Insurance Cost?

D&O Insurance cost varies depending on a few factors:

• The size of the business or organization
• How many board members/executives that 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 around $1,000–2,000 annually. A large organization can pay in the tens of thousands for coverage to protect their business.

Get a Free D&O Insurance Quote

As your business grows, don’t let the risk exposure grow with it. One of our licensed insurance agents will gladly help you narrow down the right insurance company to protect your business. Whether you need an entire management liability policy or simply D&O insurance, Tivly has you covered! Enter your zip code in the form above and one of our specialists will connect with you to get you a free quote.

Reviewed By: Sarah Reid, Licensed Agent