What is D&O Insurance?

red_umbrella_of_riskWith increased control and scrutiny of corporate practices, directors and officers are under ever more pressure. Just the allegation of an error or misdemeanor can lead to extensive losses of personal assets even for those serving a part time, non-executive, or honorary role in an organization. To protect themselves and their personal assets, many people are turning to directors and officers (or D&O) insurance.

What Is D&O Insurance?

D&O insurance protects current, past, and future directors and officers at for-profit and nonprofit companies and organizations from damages resulting from wrongful acts, both committed and alleged, throughout their time in the position. Some policies also allow the same coverage to be extended to employees. D&O insurance is advisable for any publicly traded company with a corporate board or advisory committee as well as nonprofit organizations and private companies. In fact, investors usually require you to have this insurance as one of their conditions for funding the company.

What Does D&O Insurance Cover?

D&O insurance protects companies, directors, and officers from claims made by employees, clients, and stockholders in respect to performance and duties of the executive team. This encompasses omissions, misstatements, breaches of duty, and misleading statements. Wages, fines, penalties, taxes, and multiplied damages are not covered. Directors and officers insurance should not be confused with professional liability insurance or errors and omissions coverage, which applies to performance failures and negligence in regard to products and services.

Coverage limits for D&O insurance are available from $500,000 to $1,000,000 per annual total limit and claim, and typically have a deductible around $5,000 per claim. The claim is payable to directors, officers, or the company itself as a reimbursement for losses and financial damage or as an advancement of defense expenses for criminal and regulatory investigations or trials.

Insuring Clauses

There are three insuring clauses for D&O insurance according to Southeastern Bankruptcy Law Institute. These are Side-A (non-indemnified), Side-B (indemnified), and Side-C (entity securities coverage).

Side-A supplies individuals with coverage when they are not compensated by the corporation either due to state law or to the financial capacity of the organization. Side-A is subject to exclusions in cases where the company refuses to pay for legal defense or losses and when a bankruptcy court issues an order that prevents this coverage.

Side-B provides corporate reimbursement to the organization when the company compensates directors and officers.

Side-C is used for security claims brought against a corporation. It is only applicable to publicly traded companies and large private companies. Small private companies can obtain similar protection through entity coverage.

There is also a Side-D clause, but it is only offered by some policies. This provides a sublimit for investigative costs arising from shareholder demands in a derivative lawsuit.

For more extensive coverage than what is described above, you should seek a Broad Form Side-A Difference in Conditions (DIC) policy. This provides Side-A type coverage but goes further in protecting personal assets.

The Bottom Line

If you are considering taking a position on a company or non profit board, it is worth ensuring that the organization has purchased D&O coverage. As a business, this type of coverage is a critical tool that can help reduce your exposure in the event you are sued. Because there are several types of D&O coverage, it is worth contacting your business insurance provider to develop a policy appropriate to your company and situation.

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