As a director or officer of a public or private company, you need to be able to appropriately respond in case you become subject to an investigation or are named in litigation.
Directors and officers are sued for a variety of reasons related to their company roles, including:
- Financial losses or bankruptcy related to breach of fiduciary duty
- Company asset misrepresentation
- Company fund misuse
- Fraud
- Workplace law compliance failure
- Poaching customers from competitors
- Stealing intellectual property
- Failure to follow proper corporate governance
Illegal acts or illegal profits are generally not covered by D&O insurance.
That’s why you need to have strong protections in place to reduce your exposure to personal liability.
When directors and officers are sued by a large number of parties who interact with a business—including employees, customers, investors, competitors, and vendors—they and their spouses require protection from directors and officers (D&O) liability insurance. Through their management of a company, nearly every act they commit while on the job can be construed as wrongful either in actuality or allegedly.
Legal fees, settlements, and other costs are typically covered by insurance, which also protects the company. A D&O insurance policy provides financial backing for an indemnification provision protecting officers from losses. Many officers and directors will want a company to provide both indemnification and D&O insurance.
D&O covers a litany of exposures that board members and executives of a company may face, including claims from:
- Shareholders, Investors, Partners, & Members: Merger/acquisitions, financial performance, stock or other offerings, conflict of interest, bankruptcy, and financial reporting;
- Customer, Clients, and Consumer Groups: Refusal of credit, extension, debt collection, deceptive trade practices, contract disputes, restraint of trade, dishonesty, and cost, quality of product or services; and
- Other Third Parties, Including Competitors: Antitrust, copyright/patent infringement, business interference, competitor disputes, company defamation, tax issues, and regulatory/ other government issues. (Source: E-Risk Services, LLC)
The Structure of D&O Policy
Most D&O insurance policies are divided into three insuring agreements—: Side A, Side B, and Side C. For publicly listed companies, ABC policies are the standard-form policies for generally choosing. The company may consider only purchasing A coverage as a cost-saving measure [see table].
| Coverage Type | Description | Who is insured? |
| Side A | Protects the personal assets of officers and directors against claims and legal defense costs. Used when the company cannot indemnify the individual for legal or financial reasons. | Individual Directors & Officers |
| Side B | Protects the balance sheet and assets of the firm against claims or legal defense when the firm can legally indemnify directors and officers. This coverage is paid to the directors and officers on behalf of the entity. | Individual Directors & Officers |
| Side C | Protects the assets of the firm against claims made against the entity rather than an individual. For public companies, this covers securities claims. | Firm or Entity |
Is D&O Insurance Mandatory?
In New York, D&O insurance is not mandatory, but it is increasingly becoming a standard part of corporate insurance planning.
The Benefits of Having D&O Insurance?
Protection and ensuring that only the best management is put in place.
- Growing companies need the experience and connections of qualified management.
- With protection in place, high-quality people being considered for a role will be more inclined to accept, knowing that the company has put their financial security and protection top of minds.
- D&O insurance can also make mergers or acquisitions go more smoothly as people facilitating these kinds of growth events will not have to fear the threat of litigation and the financial impact that may entail.
- D&O insurance will already be budgeted for, and the company will be protected.
Does Your Business Need D&O Coverage?
Contrary to popular belief, D&O claims are not limited to public companies. Both public, private, and non-profit businesses can be vulnerable to D&O lawsuits. It is important for any company with a board of directors or an advisory committee to consider purchasing D&O insurance, including non-profit organizations. Regardless of revenue or size, directors and officers can still be held personally liable for their actions and decisions. Therefore, even smaller businesses with fewer assets may benefit from D&O coverage just as much as larger corporations.
Game Plan for the Company’s Decision-Makers
First, consider the following:
- If you are looking to secure venture capital or funding from investors, you will most likely need to have D&O coverage in place, as a form of protection for the investors.
- If you want to attract and retain qualified directors, D&O coverage will protect those who might otherwise be reluctant to put their personal assets at risk.
- If your business operates in a high-risk industry, has a high level of public exposure, or if its directors and officers face a significant level of personal financial risk, D&O coverage may be worth considering.
Ultimately, the best way to determine whether your business needs D&O coverage is to consult with a qualified First Cover insurance professional who can assess your specific needs and risks.