Did you know that a standard business insurance policy doesn’t automatically protect individuals who run a company or nonprofit? In fact, officers and volunteer members on the board of directors could still be held personally liable in the case of a lawsuit against the business.
So, how do you protect your company’s leadership team?
Enter directors and officers liability insurance—the only way to shield individuals who serve on committees and boards from liability and personal financial loss.
Maybe you’ve heard about D&O insurance but want to learn more? Or maybe this is all so new to you and you need a thorough explanation. Whatever the case, let’s get started.
What is D&O insurance?
Directors and officers insurance, also referred to as D&O, is all about protecting the “higher-ups” of a company.
It covers anyone who serves as a director or as an officer for a:
- Wrongful action allegations
- Securities litigation Complaints
- Criminal cases
- Breaches of fiduciary duty
- Regulatory actions or practices
Because these types of allegations are common in the business community, many companies are deciding to purchase D&O insurance as a way to retain and attract accomplished board members and executives.
What does D&O insurance cover?
D&O insurance is one of the primary ways you can safeguard both your organization and its key members from a liability claim. Many experts suggest that it’s an ideal complement to general liability insurance, since a general liability policy can cover claims related to third-party bodily injury or property damage, whereas D&O applies to wrongful claims acts.
And what are wrongful claims acts?
Wrongful claim acts are (usually) situations where economic or monetary loss occurred that was unrelated to property damage or an injury. Common examples include wrongful termination claims, discrimination suits, or contractual disputes.
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A D&O policy has several parts, which are referred to as sides A, B, and C:
- Side A – Shields a business’ board of directors and officers when the company lacks the funds to indemnify—provide compensation for damages or losses caused by a liability suit—the individual
- Side B – Repays the entity when it indemnifies the individual(s)
- Side C – Sometimes referred to as “entity coverage,” it prevents disputes over coverage allocation when both the individuals and the business are named as co-defendants
What does D&O insurance not cover?
As with most types of policies, directors and operators insurance policies vary depending on your company, its risk profile, and the insurer. Oftentimes, that policy can be tailored to suit the business’s specific liabilities. However, generally speaking, many D&O policies exclude the following:
- ERISA (The Employee Retirement Income Security Act)
- Insured vs. insured claims
- Pending and prior litigation
- Personal profiting
- Bodily injury
- Property damage
- Late claim notice
- Accounting of profits
- Illegal compensation exclusions
Why D&O matters
Being a leader of a company is a responsibility that comes with inherent risks. There are all sorts of specific claims that can be made against an individual within the leadership team in our society today, including:
- Shareholder suits over stock or company performance
- Lack of corporate governance
- Theft of intellectual property
- Cyber liability
- Mismanagement or dereliction of fiduciary duties that resulted in financial loss or bankruptcy
- Failure to comply with regulations and laws
- Employment malpractice
- HR issues
- Making decisions that supersede the authority granted to their role
- Pollution or other regulatory claims
These are just a few of the liability exposures members of a corporate leadership team could face. And, because the risk landscape is continuously evolving and changing, the need for D&O insurance is greater now than ever before.
In addition to this, there are three factors that are driving the demand for D&O:
- Employees know their rights – Individuals working within a company are more versed on their employment rights than ever
The modern media environment – In the U.S., there’s often a media circus that accompanies high-profile class-action suits. Unfortunately, the promise of a big paycheck or a settlement can tempt people to make claims, even if they’re untrue or overstated.
Investors want to hold businesses accountable – Investors want the business to be successful and profitable. If the board and executives continue to fail to uphold their fiduciary duty, the investors and shareholders could claim that they’re responsible for their financial losses.
What value is added by protecting company leaders?
In addition to paying for claims made, directors and operators insurance offers several value-adds to any business, notably:
Pays for legal fees – Even if the individual officer or director is acquitted of any wrongdoings, trials take time and legal teams are expensive. D&O insurance would likely cover all, if not most, of the legal fees.
Entice investors – Most private equity firms or venture capital funds will require that a company have a D&O policy before they agree to invest.
Retain talented leaders – If you want the best leaders on your board or in your executive suite, they need to know that they won’t be exposed to personal liability, especially if they’re there as a volunteer.
Liability coverage via Thimble
So you’ve learned about D&O insurance, but as we’ve mentioned, D&O insurance doesn’t cover a business from third-party property damage or injury claims. Nor does this insurance coverage protect you when someone claims your negligence resulted in their financial loss. You need to consider a few extra steps beyond D&O.
To fortify your business’ liability armor, you need general liability insurance and professional liability insurance. This is where Thimble—the next big thing in small business insurance—comes in.
Thimble provides on-demand general liability and professional liability policies that offer small businesses insurance with game-changing flexibility. It works when you do; pay by the hour, day, week or month. Getting insurance has never been so simple.
Just download the Thimble app or click “Get a quote.” In under a minute, you’ll go from zero defense against liability to having a Certificate of Insurance on hand.
With Thimble, you’ll be protected from whatever life throws your way (no matter how hard they throw it).
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.