Directors and Officers, D & O Liability Insurance, is a liability insurance covering the directors and officers of an organization for claims made against them while serving on a board of directors and or as an officer of the company or organization. D & O insurance can be issued to cover the directors and officers of a for-profit businesses, privately held firms, for not-for-profit organizations like charities or churches or religious organizations, and educational institutions. These policies act as and are sometimes classified as Management Errors and Omissions Liability Insurance, and can address claims that arise out of managerial decisions that have adverse financial consequences.
For Private Company a Directors and Officers Liability Insurance policy or D & O Policy, insures directors and officers of privately held companies against claims alleging mismanagement of the company. Because private companies are usually owned and managed by a smaller number of people, unlike publicly held corporations that may have thousands or millions of shareholders, the risk factor is much smaller that that of publicly traded companies which bigger boards and have a larger number of shareholders. As a result, the potential for bigger class action lawsuits tends to be more negligible under a private company D & O insurance policy. As such, insurance premiums for private company D & O insurance policies tend to be lower than for comparable policies for publicly traded corporations.
Why are we Being Asked for D & O Insurance?
Our firm insures several companies from the incubator and start-up phase. Funding for start-ups is often made via the friends and family round whereas capital is raised by obtaining money from people familiar to you, individuals that typically are not concerned with or require D & O Insurance. However when the fund raising efforts expand outside of close circles to people or entities that are less familiar with you personally, in an effort to protect themselves as new officers, directors, or board members, in addition to requiring that your company have General Liability Insurance, Product Liability Insurance, Real Estate Insurance, and Workers Compensation Insurance, they may also require that you maintain Directors & Officers Insurance or D & O, in an effort to mitigate additional possible claims. As these new partners invest in your company they look to ensure that in the event they are dragged into a lawsuit as a result of your corporate decisions that they have protection through your D & O Insurance.
The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company. Many officers and directors will want a company to provide both indemnification and D&O insurance.
Whether you are an established company or a start-up, we can assist you with all of your D & O Insurance needs.
Why is D & O Insurance Important?
Directors and officers may and can be sued for a variety of reasons related to their company roles. A D & O Policy can provide defense for the following types of claims, including:
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Misrepresentation of company assets or falsifying corporate earnings
- Misuse or misappropriation of company funds
- Stealing of competitor’s customers
- Business Fraud
- Failure to comply with workplace laws
- Theft of intellectual property, patents, trademarks, or copyrights.
- Lack of corporate governance
Directors & officers policies typically have a shrinking limits provisions, meaning that defense costs are within the limits of the policy’s liability limits, meaning that they reduce the policy’s limits. So if your policy has a $1,000,000 limit and a suite costs $300,000 to defend, you would be left with $700,000 in coverage.
Some other means in which D & O policies differ from conventional liability policies are that they: (A) are written on a claims-made basis, (B) usually contain no explicit duty to defend the insureds and (C) cover monetary damages but exclude bodily injury and/or property damage.
Directors & Officers Liability Insurance Policies protect the personal assets of corporate directors and officers, and their spouses, in the event that a claim in brought against them personally by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
What Will a D & O Insurance Policy not Cover?
Illegal acts or illegal profits are generally not covered under D & O insurance and in typical instances a D & O Insurance policy will defend the policy holder up until the act is deemed illegal.
Do You Need D & O Insurance Coverage?
A Insurance Need is a relative concept in that there are always exposures to risk and while your current board my not want a certain type of insurance, there may be outside influences that require you to have it. Often we are approached by companies that are seeking a certain type of insurance that they SHOULD have, but have never opted for because it has been mandated, this is not to say that they don’t need it. It’s a common misconception that D & O Insurance claims are mostly a public company occurrence. The reality is that public, private, and non-profit companies all face D&O litigation risks. While you may not be required to carry a D & O or Directors & Officers Insurance Policy, more important questions to ask might be: can you company afford to defend a D & O claim?; is your board willing to pay to defend a D & O claim?; and can you afford to settle or pay a judgement on a D & O lawsuit?
Who Should Have a D & O Liability Insurance Policy?
Any business with a corporate board or advisory committee should consider investing in D & O insurance, including non-profit organizations. Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.
What is the Average Cost of a Directors & Officers Insurance Policy?
The insurance industry is dynamic, and because different industries command wildly differing costs for Directors & Officers insurance, this is not a valid question. The cost of D & O Insurance Policy a 2 member religious organization that needs $300,000 in coverage will be in a completely different galaxy than that of a $5,000,000 policy for publicly traded Drug Manufacturer. D & O policies are very specific to the company they insure. This is similar to asking the average cost of a mortgage in that they could very easily range from $500 a month into the tens or hundreds of thousands.
If you would like a free quote on a Directors & Officers Liability Insurance policy please contact us via email or call us at the number on the bottom of this page,