Directors & Officers
Sometimes called Management Liability, D&O is a form of insurance designed to protect an organization’s leaders, and the organization itself, from financial losses related to their management decisions. Not all D&O Insurance policies are the same. We can help.
Who Needs Directors & Officers Insurance?
Any organization can benefit from D&O Insurance because claims can come from multiple sources, including investors, customers, former employees, competitors, vendors, and others. Even if a claim is eventually found to be groundless, the claim can be expensive to defend, and management time can be a distraction.
D&O is grouped into the main types of organizations – which are you?
Why Do You Need D&O Insurance?
D&O Insurance provides protection to an organization’s leadership, and to the organization itself. Directors and officers are responsible for managing the affairs of the organization and have a fiduciary obligation to that organization. They must act with a high standard of care in carrying out their duties and responsibilities and can be held personally liable if their errors or neglect results in a loss to the corporation, its shareholders, or other interested parties. Individual directors’ and officers’ personal assets are at stake, and D&O Insurance is the primary method of providing protection. In addition to providing financial protection, D&O Insurance is helpful, and essential in some cases, in attracting the best candidates to run the organization. Many experienced professionals consider D&O Insurance a must-have before they will consider joining an organization.
What Are Common Directors & Officers Insurance Exposures?
D&O Insurance covers many different types of exposures and related claims. Common types of claims include:
If an investor thinks your company provided misleading information or made poor decisions that impacted the value of the company, and hence their investment, they can sue for damages.
As a fiduciary, a director or officer has a fiduciary duty to the organization and should not be taking advantage of a situation or opportunity separately from that organization. For example, an undisclosed personal interest in a trading partner could lead to an action alleging conflict of interest and self-dealing.
Theft of Intellectual Property/Trade Secrets
A recently-hired employee is alleged to have brought his prior employer’s intellectual property (IP) to his new employer, such as customer lists, resulting in a claim against both the new employee and his new employer.
Claimants are increasingly targeting D&O Insurance policies for certain types of data breach and cyber loss incidents, particularly for public companies. Underwriters have responded by excluding many types of cyber claims to ensure that certain cyber incidents are solely covered by the Cyber Insurance policy.
Employee lawsuits are typically, but not always, covered under Employment Practices Liability (EPL) Insurance, which may or may not be a part of a D&O Insurance policy. For example, if an employee believes they have faced harassment, discrimination, or wrongful termination, they often sue both the company and one or more members of management. In addition, D&O Insurance can respond to certain types of competitor claims relating to the hiring of employees.
Federal or state agencies, or third parties, may bring an action if there is reason to believe that there is misconduct (financial or otherwise) or failure to adhere to regulatory requirements. Regulatory actions can result in costly audits or other legal actions that are expensive to defend and take significant management time.
What Does Directors & Officers Insurance Cover?
If sued by third parties such as employees, vendors, competitors, investors, and customers, for alleged wrongful acts in managing an organization, D&O Insurance protects:
What Doesn't D&O Insurance Cover?
Typically, D&O Insurance will not cover:
D&O Insurance policies will typically exclude claims which should be covered in other policies or are against public policy.
Most D&O Insurance policies contain a severability clause. When a party is accused of an act excluded under the policy, such as an illegal act, the severability clause allows for coverage to be granted to other parties not involved in the excluded act.
Are There Special Situations I Should Be Aware Of?
Professional services are intended to be covered under an Errors & Omissions (E&O) Insurance policy and are therefore typically excluded under a D&O Insurance policy.
Side A Excess
In rare circumstances, D&O Insurance claims against the organization can exhaust coverage, leaving no coverage available for individual directors or officers. A product called Side A Excess is designed to fill this gap and gets its name from the section of coverage designed to respond directly to individual directors & officers – “Side A.” Side A coverage can be purchased with its own limit excess of the organization’s D&O Insurance and can be particularly important in protecting directors’ and officers’ personal assets by providing a separate limit of coverage available only to them.
Buying or Selling a Business
Buying or selling a business that carries D&O Insurance typically requires that the D&O Insurance is terminated on the closing date and tail coverage (“Tail”) put into place. The tail provides coverage for claims related to events prior to the closing but that are not made until after the closing and is often in place for two to five years. An option for Tail coverage may be built into D&O Insurance policies, but there is an active market for “Standalone Tail” from third-party insurers, often at more attractive terms.
Have a question about your specific situation?
What Does D&O Insurance Cost?
The cost of Specialty Insurance varies widely, and D&O Insurance is no different. An underwriter will consider an organization’s size, location, industry, financial strength, capitalization table, claims history, and other factors to determine its likely exposures. The underwriter will also factor in the specific terms being contemplated, such as limits, deductibles, and coverage extensions, to determine the cost. Private company D&O Insurance can cost in the $2,000 to $10,000 range for small employers, and less for the smallest employers and non-profit entities. However, the cost for most SMBs is higher.
In Addition to D&O Insurance, What Can I Do to Prevent Claims?
Risk management is a big part of minimizing potential exposures, and there are risk management steps that can be taken to reduce potential exposures and D&O claims. Some steps are obvious, and some require outside expertise, such as legal counsel. The challenge is balancing the cost and time commitment of implementing risk management initiatives with the potential reduction in claims.
Good governance and strong human resource policies are two steps that can protect organizations from D&O claims. Some Specialty Insurance underwriters provide valuable risk management information and services along with their insurance, which can be particularly useful in setting up protections.
How Do I Get D&O Insurance?
eSpecialty Insurance is your specialty insurance expert. We have developed a streamlined process to provide multiple proposals from a range of competitive insurers, along with expertise to help you evaluate your exposures and choose the best combination of comprehensive coverage and price. We look forward to working with you.
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Note: D&O Insurance policies are not all the same. Some policies are more comprehensive than others, and some policies provide broader coverage in specific areas. Not all exposures and claim types noted are covered by all D&O Insurance policies. In addition, each insured may have different exposures and coverage needs. We encourage you to read your policy and consult with a Specialty Insurance expert such as eSpecialty Insurance.