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Did you know that a standard business insurance policy doesn’t automatically protect individuals who run a company or nonprofit? Officers and volunteer members on the board of directors could still be held personally liable in the case of a lawsuit against the business. Enter directors and officers liability insurance—the only way to shield individuals who serve on committees and boards from liability and personal financial loss.
What is D&O insurance?
Directors and officers insurance, also referred to as D&O, is all about protecting company executives. It covers anyone who serves as a director or as an officer for:
- 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 purchase D&O insurance to retain and attract accomplished board members and executives.
What does D&O insurance cover?
D&O liability insurance is one of the primary ways to financially safeguard both your organization and its key members from a liability claim. For example, if shareholders sue an officer or director for mismanaging a company’s finances, D&O insurance can help to protect them.
Directors and officers insurance complements general liability insurance since a general liability policy can cover claims related to third-party bodily injury or third-party property damage, whereas D&O applies to wrongful claims acts.
Wrongful claim acts are (usually) situations where an economic or monetary loss occurred unrelated to property damage or bodily or personal & advertising injury. This may include wrongful termination claims, discrimination suits or contractual disputes.
What are the types of D&O insurance?
A D&O policy has several parts, organized into sides A, B and C:
- Side A – Shields a business’ board of directors and officers when the company lacks the funds to indemnify the individual (provide compensation for damages or losses caused by a liability suit).
- 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.
Your policy may also include excess D&O insurance, which provides additional coverage but often has different rules and requirements.
What does D&O insurance not cover?
As with most types of policies, it depends on your company’s risk profile, the policy you purchased, and the claim’s specifics. Often, you can tailor the policy to suit your business’s potential liabilities. However, generally speaking, many D&O policies exclude the following:
- Pending and prior litigation
- Bodily injury
- Property damage
- Late claim notice
Why should you get D&O insurance?
Leading a company is a responsibility that comes with inherent risks. Many claims can be made against an individual within a leadership team. Some of these include:
- Shareholder suits over the company’s performance or stock performance
- Lack of corporate governance (or perceived lack)
- Theft of intellectual property
- Mismanagement or dereliction of fiduciary duties that resulted in financial loss or bankruptcy
- Failure to comply with regulations and laws, and more
These are just a few of the liability exposures members that a corporate leadership team could face. Because the risk landscape is continuously evolving and changing, the need for D&O insurance is greater now than ever before. Three factors drive the demand for D&O:
- Consumers know their rights and are less tolerant of missteps made by responsible businesses.
- The modern media environment is changing. In the U.S., a media circus often 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. 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.
D&O insurance adds value
You may want to consider the value that D&O insurance can add to a business, notably:
- Provides your legal defense – 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.
The cost of D&O insurance is worth it
The premium cost of D&O insurance can range anywhere from a few hundred to a few thousand dollars per year. Some of the main factors are your business’s annual revenue, the type of business your company conducts, the number of employees you have, and how many years you’ve been in business. However, you could be on the hook for much more — and put your business in jeopardy — without it.
Don some D&O armor
While D&O insurance is important for businesses, it doesn’t cover a company facing claims of third-party property damage or third-party bodily injury. Nor does it protect you if a client claims that your negligence resulted in their financial loss. With this in mind, you should consider coverage beyond D&O.
To arm your business against the unexpected, you should purchase general liability insurance and professional liability insurance. This is where Thimble can help. We’re the next big thing in small business insurance.