A Closer Look at Directors and Officers Insurance

June 23, 2020

In any corporation, the company’s leadership team is comprised of a group of executives entrusted with managing the business. These leaders must often make difficult decisions that influence the financial stability and growth of a given company. The duty to manage the company comes with significant risk exposures, necessitating specialized liability insurance protection. That is where Directors & Officers (D&O) liability insurance plays a vital role, protecting the personal assets of corporate executives and their families. Here is a closer look at D&O insurance, how it works, and how it can give peace of mind to corporations across industries.

What is Directors and Officers Liability Insurance?

Known in the insurance world as “D&O” insurance, Directors and Officers Liability Insurance is one part of a comprehensive risk management strategy for corporations. In simple terms, this insurance is designed to protect the personal assets of corporate leaders and their spouses in the event they are sued by other parties for any alleged or actual wrongful acts committed while managing the company. Personal suits for alleged or actual mismanagement can come from employees, customers, vendors, and investors in the company as well as many other third-party sources.

In addition to protecting the personal assets of corporate leaders, D&O insurance typically provides coverage for the legal expenses, judgements or settlements, and other costs associated with legal claims.

What are the Risks Directors and Officers Face?

The executive leaders of a company have an obligation of corporate governance, or the actions needed to keep the company healthy and secure. Unfortunately, this obligation comes with substantial risks. Anyone who believes that the directors and officers of a company are failing in their roles in corporate governance or financial duties may wish to file a legal claim against them. Common legal claims include:

• Lack of or negligence in corporate governance
• Failure to comply with workplace and employment laws
• Misuse of corporate funding
• Misrepresentation of the company’s financial assets
• Breaches in fiduciary duty, including financial losses or bankruptcies
• Claims from competitors, including theft of intellectual property or patents as well as poaching competitors’ customers

Under most D&O policies, criminal acts or illegality are not covered. While allegations of fraud are a common type of legal claim filed against corporate leaders, legitimately fraudulent behavior on the part of these leaders is generally not covered under D&O insurance.

Who Needs D&O Insurance Coverage?

For many years, D&O insurance has been associated with the largest corporations, such as prominent Fortune 500 firms. In reality, nearly every business that has a corporate board of directors or a management advisory committee can benefit from the protections afforded by D&O liability insurance. This can include both profit and non-profit companies as well as public agencies or organizations. If an organization has a directors group, any of those leaders can be personally sued for the myriad of reasons illustrated above. Investing in D&O insurance makes sound financial sense, protecting the assets of leaders and their families. ◼