What is D&O Insurance?

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Contributor, Benzinga
February 16, 2022

Directors and Officers (D&O) insurance protects the company's directors and officers from liability claims. If high-ranking board members or executives are found to have been negligent in their duties, D&O liability insurance is designed to shield them from personal damages if they are sued. According to the Insurance Information Institute (III), D&O insurance is designed to protect company leaders of private businesses, for-profit firms, non-profit organizations and educational facilities from negligence lawsuits.

Keep reading to learn more about D&O insurance and if your company needs this type of insurance protection.

What is D&O Insurance?

D&O insurance provides organizations with liability insurance protection for officers and directors of the company against negligence claims. 

Included in a D&O policy are several parts that are referred to as “sides.” Here is an explanation of each section of a D&O policy.

Side A: Provides protection for a corporation's directors and officers in the event that the corporation is unable to indemnify them.

Side B: Reimburses the organization when it pays out compensation to injured parties, safeguarding the company's financial position.

Side C: Often referred to as "entity coverage,"  is designed to minimize disagreements about who the "insured" is when both the directors and executives of the organization and the insured organization are named as co-defendants in a securities case.

How Does D&O Insurance Differ from E&O Insurance?

While both D&O Insurance and errors and omissions (E&O) insurance are similar and are both essential coverages for your business, they differ in their purpose and the specific risks covered. D&O insurance explicitly covers directors and officers of the company, while E&O insurance is a form of professional liability insurance that covers errors, acts and omissions performed by other company employees. Here are some of the most common risks covered by each type of policy.

D&O InsuranceE&O Insurance
Misuse of fundsData breach
Fiduciary failureBreach of warranty
FraudNegligence
Non-compliance with laws and regulationsMisrepresentation
Failures in corporate governanceClerical errors

Why Do Businesses Need D&O Insurance?

Aside from paying for claims against corporate leadership, directors and officers liability insurance allows a firm to:

Keep strong leaders: Not many reputable directors and officers job candidates will be willing to join your firm without liability protection against negligence lawsuits. D&O insurance can help potential job applicants feel secure in their decision to join your company. 

Pay legal fees: Even if directors and officers are cleared of misconduct, your company may face considerable legal costs if they are sued. Your D&O coverage may cover your company's legal fees.

Attract investors: Most private companies and investment firms will not invest in your company’s stock unless you are covered by D&O insurance.

The type of D&O insurance your company needs depends on liabilities, legal fees and other exposures that would be protected by D&O insurance. Coverage should be chosen according to the unique risks of your organization. If you are unsure what type of D&O coverage is right for you, schedule a consultation with your insurance agent to review your coverage options. 

What Type of Business Needs D&O Insurance?

D&O insurance covers directors and officers and managers, board members and the spouses of those individuals. Personal liability insurance kicks in when the policyholder is sued for alleged wrongdoing while in a managerial capacity; such lawsuits may be initiated by workers, customers, clients, vendors, competitors or investors.

In the event of litigation, D&O insurance may cover legal fees and settlement and judgment costs.

Despite what some believe, private enterprises and non-profits can also benefit from D&O insurance, which provides liability protection. You can benefit from D&O insurance if your organization has a board of directors that frequently communicates with investors, employees, other companies or the public.

Some specific company types that will most benefit from D&O insurance protection are listed below.

New Venture/Start-ups: A common misconception is that D&O insurance is only necessary for large, publicly traded companies. D&O insurance is essential for small enterprises, including startups. A possibility of a lawsuit exists when senior executives and stakeholders communicate with other employees and investors. 

Venture Capitalists: The importance of D&O insurance for venture investors cannot be overstated. When it comes to investing in a new company, investors are concerned about security issues as well as financial stability. Investors want to know your company is protected and has the ability to grow. 

Private Investment Corporations: Increasing the number of shareholders in a privately held corporation raises the possibility of a shareholder lawsuit against the board of directors or officers. As a result, D&O insurance was created to address this issue.

What Types of Directors & Officers (D&O) Liability Insurance Do I Buy?

The decision to get D&O insurance is mostly influenced by the needs of your company and the financial resources available to it. Here are a few points to bear in mind:

  • Should the policy cover the entire organization or should only the top executives be covered?
  • What level of protection should be provided?
  • What areas do you believe will have the greatest potential for D&O risks in the future for your organization in particular?

It's crucial to understand if the D&O policy you're considering is an "obligation to indemnify" or a "duty to defend" policy before obtaining it.

Firms are responsible for appointing their own legal defense teams as part of an indemnity policy. Following a review by the insurer, which determines that the defense costs were "fair," they will reimburse the company for the costs incurred in the defense. While the insurer is not legally responsible for the company's defense, the policy's terms provide that it is compelled to do so in certain circumstances.

Most small firms choose duty to defend insurance since the procedure is streamlined, the headache is avoided and all the defense costs are covered by the policy.

When Do You Need D&O Insurance?

The best time to purchase a D&O policy is before you have a liability lawsuit against one of your directors or officers. However, certain events, such as company expansion, becoming a publicly-traded company or a change of executive positions, can increase the likelihood of a negligence claim and should trigger a review of your insurance coverage options.

Compare D&O Insurance Providers

Benzinga has done the legwork for you and prepared a list of the best D&O insurance providers for you to review. You can start your search for D&O insurance by looking through the list provided below.

Is D&O Insurance Right for You?

D&O insurance is not a  required coverage, but it is widely used to protect against the consequences of actions and decisions of boards of directors and officers, which may bring about a lawsuit. The policy will pay for wrongful allegations defense, court costs, judgments, or settlements resulting from negligence lawsuits. D&O insurance is essential coverage to protect your company from costly lawsuits.

Frequently Asked Questions

Q

Is D&O insurance necessary?

A

D&O insurance is not a legal requirement for companies; however, it can protect your company’s leadership from financial losses resulting from negligence lawsuits.

Q

What is not covered by D&O insurance?

A

Standard exclusions in a D&O policy include accounting of profits, pending or prior litigation, bodily injury or property damage claims and some types of fraud claims.

About Janet Hunt, Insurance Agent

Janet has been working in, and writing about, the insurance industry for over 20 years.