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Directors & Officers Insurance

Directors and Officers Insurance, also known as D&O Insurance, is insurance liability coverage designed to protect individuals in management positions—and sometimes also the company they work for—from personal losses if they are sued. The suit is generally a result of serving as a director or officer for a private business, public company or nonprofit organization. Depending on the kind of coverage, D&O Insurance protects individuals when their company can not or will not indemnify them, protects the company when it does indemnify its directors/officers, and protects the corporation and its directors/officers if both parties are involved in the suit.  
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Who Should Buy Directors & Officers Insurance

As the one of the directors or officers of a public company, private corporation or a nonprofit organization, your decisions and actions impact all the people who work for you. While this may mean 10 individuals or thousands of employees, the bottom line is the same: Your actions have consequences. 

Sometimes these consequences are positive and to the benefit of your employees and company. Other times, errors, lapses in judgement and misguided decisions can have serious consequences that result in a lawsuit filed against you personally.

That is where Directors and Officers insurance steps in. This policy is created to protect your personal interests in the event of a suit against you. Even if you’re not the CEO of a multi-million dollar corporation, D&O Liability Insurance is a worthwhile investment because you never know when a choice you make at work can result in you personally being held accountable in a legal action. 

Any business with a corporate board or advisory committee should consider investing in Directors and Officers Insurance.

Directors & Officers Insurance Coverage Options

Whether you work as a director or officer for a private company, public corporation or a nonprofit organization, it’s important to have Directors and Officers Insurance to protect your personal assets in the event you are sued. Generally, suits against management is due to the result of a decision or action taken while partaking in regular work duties. Not only can D&O Insurance protect your own interests, but also your spouse’s. 

Typically, D&O Liability Insurance has three policies:

  • Side A Coverage
  • Side B Coverage
  • Side C Coverage

Side-A Coverage

Side-A Coverage is the first insuring agreement of a D&O insurance policy. It provides first dollar coverage. This can include defense costs and legal fees, settlement costs and financial losses if a suit is successful. Side-A coverage protects directors and officers against costs that are not indemnified or compensated by the corporate entity or company.

Common claim scenarios that may result in using Side-A Coverage include:

  • Bankruptcy Claims: The company has declared bankruptcy and does not have the funds to indemnify the director/officer. 
  • Derivative Litigation: The company can’t indemnify the director/officer because one or more shareholders has brought the suit against the directors/officer on behalf of the company. 
  • Regulatory and Criminal Proceedings: It’s important to note that Side A Coverage will protect an insurer unless they have been found guilty of criminal misconduct. 
  • Acts of “Bad Faith”: The director or officer took part in intentionally dishonest acts such as not fulfilling legal or contractual obligations, intentionally misled another party, entered into an agreement with no intention of fulfilling it. 
  • Refusal/Wrongful Refusal to Indemnify: The corporation/company has refused to indemnify the directors/officers being sued. 
  • Laws or Statutes that Prevent the Corporation from Indemnifying. 

Side B Coverage

Side-B Coverage is also known as Corporate Reimbursement Coverage. It is the second insuring agreement of a D&O policy. It provides reimbursement to the corporation or company that occur when defending directors/officers from suits. This reimbursement is in accordance with the corporation’s indemnification obligations. 

Essentially, when a corporation covers the cost of legal fees and defense costs, settlements and financial losses if a suit is successful on behalf of its director or officer, the company can then face significant financial trouble. Even the largest organizations can struggle after indemnifying their officers/directors. Side-B Coverage protects public corporations, private companies and nonprofit organizations if they protect their directors and officers. 

Side-C Coverage

Side-C Coverage is also referred to as Entity Coverage because it protects organizations when they are named in lawsuits along with their directors/officers. It is the third insuring agreement of a D&O Insurance Policy. Side-C Coverage tends to be broader for private companies. For public companies, Side-C Coverage trends to only protect against securities claims and is meant to protect a company from shareholder disputes.

Directors & Officers Insurance Claims Examples

Director and Officer Insurance can protect individuals in management positions in nonprofit organizations, public companies and private companies against a variety of claims. A few examples include:

Claims Resulting from Organization Donors

The Board of Directors of a church was sued by a number of their donors. The donors alleged the Directors misrepresented the financial status of the church. Three donors brought separate suits for repayment of the money lent to the church. The first case settled for $240,000, of which $117,000 was accounted for expenses. The second case settled for $75,000 and incurred $86,000 in defense costs. The last case paid nothing to the claimant, but incurred $13,000 in defense costs. The total loss, including defense costs, was more than $530,000.  

Third Party Lawsuits 

An organization filed a suit against a foundation and its Board of Directors for improperly infringing upon the organization’s intellectual property rights. The organization filed a suit asking for injunctive and monetary relief for the improper use of trademarked property during a fundraiser. The claim was settled and the total loss, including defense, was more than $400,000. 

Employee and Volunteer Suits 

The most common claims made by employees and volunteers can include:

  • Harassment 
  • Discrimination
  • Wrongful termination
  • Retaliation
  • Hostile work environment 

For example, a former employee of a company discovered illegal transactions involving retirement funds. Shortly after reporting the violations, she was terminated by her employer. The employee filed a suit alleging retaliation and wrongful termination. The claim was settled for more than $80,000 and the total loss exceeded $100,000. 

Claims Made by the Beneficiaries and/or Clients of an Organization

A discrimination suit was filed against the Board of Directors when the claimant, who was a resident at a drug and rehabilitation centre, requested a transfer within the housing complex. The claimant alleged discrimination based on national origin, religion and sex. The case was dismissed due to a lack of evidence, but more than $10,000 was paid in defense costs. 

Claims Against Directors to Protect the Members’ Interests 

A law enforcement fraternity began proceedings to have a member removed from the organization. This member then sued the organization to have the proceedings halted. There was no monetary settlement, but  the defense costs were still around $15,000. 

Frequently Asked Questions

Why Do I Need Directors and Officers Insurance?

D&O Insurance protects the personal assets of not only directors and officers of a nonprofit, private company or public corporation, but also their spouses. D&O Insurance protects against suits resulting in actual or alleged wrongful acts. Some groups/individuals who can sue on these grounds include: 

  • Employees
  • Donors
  • Members
  • Beneficiaries
  • Volunteers
  • Investors
  • Customers 
  • Other third parties 

What Do I Need to Apply for D&O Insurance? 

If you’re a director or officer of a nonprofit or private/public company interested in Directors and Officers Liability Insurance, then you will need to have the following prepared to get an insurance quote:

  • General information about your company (name, address, contact, website etc.)
  • Your name and title
  • Background information of the company including: 
    • Length of operation
    • Nature of business
    • Stock ownership
    • History of changes in management
    • Information about shareholders
    • Recent acquisitions
    • Bankruptcy 
  • Information about employees, such as:
    • Total number of employees
    • Total salary expense 
    • Turnover rate
    • Number of unionized employees
    • Areas with highest number of employees
    • Recent layoffs 
  • Information regarding employee benefit plans 
  • History of pending, civil, criminal, administrative or arbitration proceedings
  • Current insurance policies information 

What Does D&O Insurance Cost? 

Since the cost of D&O Liability Insurance varies, it’s best to obtain a quote from your insurance broker to know how much it will cost. The cost of Directors and Officers Insurance is based on a variety of factors, including:

  • Type of business
  • Your company’s revenues
  • Whether you have prior legal claims
  • Amount of debt 

Is Directors and Officers Insurance the Same as Professional Liability? 

No, Directors and Officers Insurance is not the same as Professional Liability Insurance. D&O Liability Insurance policies protect the personal interests of individuals in management positions in public/private companies and nonprofit organizations from being sued due to the impacts of an alleged or actual wrongful act. 

Professional Liability Insurance protects individuals who offer professional advice or services in the event they make an error or fail to do something while conducting those professional services that results in a suit. 

Is Directors and Officers Insurance the Same as Errors and Omissions? 

No, Directors and Officers Insurance is not the same as Errors and Omissions. Errors and Omissions Insurance is also known as Professional Liability Insurance. While D&O Insurance protects the personal interests of directors or officers within a company, E&O Insurance protects any individual offering professional services in the event they make a mistake. 

Directors and Officers Insurance vs General Liability: How Are They Different? 

General Liability Insurance covers the cost of property damages or personal injury as the result of a product or service. This type of insurance policy differs from Directors and Officers Insurance because D&O Insurance covers the resulting legal fees, defense costs, settlement costs and financial losses of an individual who is a director/officer with a company and facing a suit for alleged or actual wrongful acts. 

Is D&O Necessary? 

For many businesses, the cost of D&O lawsuits has become sufficient enough to warrant making Directors and Officer Insurance a necessity. There are a multitude of vulnerabilities that individuals in management positions at private/public companies and nonprofit organizations can be exposed to. It’s best practice to protect your personal interests—and those of your spouse—in the event of a worst-case-scenario. 

When Does a Small Business Need Directors and Officers Insurance? 

Even if you are not a multi-million dollar corporation employing thousands of people, it’s still a good idea to consider getting Directors and Officers Insurance. Although larger companies tend to have more risk—as the bigger the company the greater the likelihood that something may go wrong—as employees gain a greater understanding of their rights, lawsuits against directors and officers are increasing. It’s always better to be safe rather than sorry and protect yourself before being the recipient of a suit. 

Why Do Nonprofit Organizations Need Directors and Officers Liability Insurance? 

Directors and Officers Liability Insurance is very common in the nonprofit sector. Having this insurance as a safety net protects against the actions and decisions of board directors and officers. Not only does D&O Insurance protect the personal interests of these individuals—particularly if tied financially to the nonprofit—but it also can protect the nonprofit itself in the event of a suit. Depending on the situation and insurance policy, a nonprofit may have to indemnify the accused employees, which can incur a significant financial loss to the organization.  

Can an Individual Buy D&O Insurance? 

Yes, independent directors can purchase Director and Officer Insurance on their own, without asking their company to do so and without permission from the company. An individual director may feel the need for additional safety or coverage that is not provided by their company or organization. 

Does D&O Insurance Cover Breach of Contract? 

No, D&O Liability Insurance policies do not cover breach of contract claims, as parties entering into contracts voluntarily accept the associate risk and potential for liability that the contract will be breached.

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