What is Directors and Officers Liability Insurance (D&O)? Directors and officers (D&O) liability insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization. It can also cover the legal fees and other costs the organization may incur as a result of such a suit.
Directors and officers liability insurance is akin to corporate governance, corporate law, and the fiduciary duty owed to stakeholders, such as shareholders and beneficiaries.
US federal law grants directors and officers broad discretion in their business activities. Corporate law is typically handled at the state level. Publicly traded companies are subject to more federal regulation than privately held companies, particularly due to the Securities Act of 1933 and the Securities Exchange Act of 1934.
Directors and officers liability Insurance (also written "directors’ and officers’ liability insurance";[ often called "D&O") is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for losses r advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers. Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. Intentional illegal acts, however, are typically not covered under D&O policies.
It has become closely associated with broader management liability insurance, which covers liabilities of the corporation itself as well as the personal liabilities for the directors and officers of the corporation.
1. "Directors and officers (D&O) liability insurance covers directors and officers and/or their company or organization if sued"
2. D & O insurance claims are paid to cover losses associated with the lawsuit, including legal defense fees.
3. Most policies exclude fraud and criminal offenses.
Directors and officers liability insurance applies to anyone who serves as a director or an officer of a for-profit business or nonprofit organization. A directors and officers liability policy insures against personal losses, and it can also help reimburse a business or nonprofit for the legal fees or other costs incurred in defending such individuals against lawsuits.
Directors and officers liability insurance claims are paid to directors and officers of a company or organization for losses or reimbursement of defense costs if legal action is brought against them. Such coverage can also extend to criminal and regulatory investigations or trial defense costs. Civil and criminal actions are often brought against directors and officers simultaneously.
Important: "D&O insurance has become closely associated with broader management liability insurance, which covers liabilities of the corporation, as well as the personal liabilities for the directors and officers of the corporation".
D&O policies can take different forms, depending on the nature of the organization and the risks it faces. It’s best to seek out an insurance company with deep experience in this specialized field. The policies are generally purchased by the organization to cover a group of individuals rather than by the individuals themselves.
If a company fails to disclose material information or willfully provides inaccurate information, the insurer may avoid payment due to misrepresentation. The "severability clause" in the policy conditions may be intended to protect against this by preventing misconduct by one insured from affecting insurance for other insureds; however, in certain jurisdictions, it may be ineffective.
Policies can be written to insure against a variety of hazards, but they generally make exclusions for fraud, criminal activity, and illegal profits. Also, most policies contain "insured vs. insured" clauses, whereby no claim is paid when current or former directors and officers sue the company. This prevents the company from profiting from deceit or conspiracy.
Coverages: Under the "traditional" D&O policy applied to "public companies" (those having securities trading under national securities exchanges etc.), there are three (3) insuring clauses. These insuring clauses are termed: Side-A or "non-indemnified"; Side-B; or "indemnified"; and Side-C; "entity securities coverage". D&O policies may also provide an additional Side-D clause, which provides for a sublimit for investigative costs coverage related to a shareholder derivative demand. In detail, the coverage clauses provide the following:
Side-A provides coverage to individual directors and officers when not indemnified by the corporation as a result of state law or financial incapability of the corporation; however, exclusions may apply if a corporation simply refuses to pay the legal defense/loss of a director or officer, or if a bankruptcy court issues an order preventing such indemnification
Side-B provides coverage for the corporation (organizations) when it indemnifies the directors and officers (corporate reimbursement)
Side-C provides coverage to the corporation (organizations) itself for securities claims brought against it (NOTE: securities claims only coverage applies to publicly traded companies and large private companies; small private companies may be able to obtain broader "entity" coverage)
More extensive coverage can be obtained for individual directors and officers under a Broad Form Side-A DIC ("Difference in Conditions") policy purchased to not only provide excess Side-A coverage but also to fill the gaps in coverage under the traditional policy, respond when the traditional policy does not, protect the individual directors and officers in the face of U.S. bankruptcy courts deeming the D&O policy part of the bankruptcy estate and otherwise more fully protect the personal assets of individual directors and officers.
The types of claims are dependent upon the nature of the company. Directors and officers of a corporation may be liable if they damage the corporation in breach of their legal duty, mix personal and business assets, or fail to disclose conflicts of interest. State law may protect the directors and officers from liability (particularly exculpatory provisions under state law relating to directors). Even innocent errors in judgment by executives may precipitate claims.
The types of claims are dependent upon the nature of the corporation. For public companies, claims are primarily due to lawsuits by shareholders after financial difficulties, with a 2011 Towers Watson survey finding that 69% of publicly traded company respondents had a claim for a shareholder lawsuit in the past 10 years as opposed to 21% of private companies respondents. Other claims arise from shareholder-derivative actions, creditors (particularly after entering the zone of insolvency), customers, regulators (including those that would bring civil and criminal charges), and competitors (for anti-trust or unfair trade practice allegations). For nonprofits, claims are typically related to employment practice and less commonly regulatory or other fiduciary claims. For private companies, claims are often from competitors or customers for antitrust or deceptive business practices and one survey of 451 executives found that lawsuits cost an average of $308,475.
One relatively neglected area is the personal liability to non-shareholders that directors may face due to torts committed as a result of negligent supervision.
