What Is Directors and Officers Insurance?

Directors and officers (D&O) insurance helps protect the personal liability and assets of a company’s directors and officers. It can also help protect against lawsuits from investors, customers, employees, or other parties claiming that the directors and officers managed the company wrongly. While the name makes it sound like the insurance is only for the directors and officers, it also helps protect the company by managing legal fees and other costs associated with such lawsuits. Learn more about this crucial coverage most officers and directors require before joining your organization.

What Is Directors and Officers (D&O) Liability Insurance?

Directors and officers liability insurance is a type of commercial insurance, meaning companies and organizations take out these policies rather than individuals. It holds officers harmless for losses related to their work within the organization. Experienced senior-level directors and officers may require that your company have this insurance before they join.

The insurance insulates directors, officers and their spouses from lawsuits related to the following.

• Fraud
• Company asset misrepresentations
• Workplace law infractions
• Poor corporate governance
• Fiduciary duty breach that leads to financial losses
• Using company funds improperly
• Intellectual property theft

However, the insurance does not protect Directors and officers from everything. They still cannot commit illegal acts or generate profits illegally. 

How Does Directors and Officers Insurance Work? 

Directors and officers insurance is a company-purchased policy. That means that the individuals do not purchase or manage the insurance; instead, the company they work for holds the policy. 

Should directors or officers face lawsuits related to their roles in the company, the insurance reimburses defense costs incurred while defending against claims from employees, shareholders, customers, competitors, or any third party. 

The insurance will cover monetary damages, settlements or awards that the courts order you to pay. This helps protect the individual’s personal assets.

Additionally, the insurance provides coverage for the company if it is sued. But that coverage is limited and companies should still carry general liability insurance and other forms of business insurance.

Types of Directors and Officers Liability Insurance

D&O insurance includes three types of agreements: Side A, Side B and Side C. Here’s an overview of these coverages and what each covers.

Side A Coverage

This coverage aids Directors and officers when the company cannot pay for indemnification. You might find this coverage when you work with a company that has declared bankruptcy or is in financial trouble. Side A coverage specifically insures the officer’s personal assets.

Side B Coverage

In contrast to Side A, Side B coverage is for the company, not individual officers. It protects corporate assets that could be at risk during lawsuits. This insurance reimburses the company for losses when it indemnifies its officers.

Side C Coverage

Side C coverage, also called entity coverage, protects the company when its corporate assets are at risk. It is solely for the company. This coverage protects the company if it is accused of financial mismanagement.

What Does a D&O Policy Cover?

A D&O policy can help cover the Directors, officers, and company for various scenarios, though your specific policy might differ. Review policy language for the most accurate listing of coverage.

• Fiduciary duty breaches
• Mismanagement or not acting with the company’s best interests in mind
• Inaccurate or misleading financial reporting
• Poor or inaccurate disclosure
• Omissions or misrepresentations in public offerings or fundraising prospectus
• Noncompliance with laws or industry regulations
• Negligence or actions that lead to the death of someone else, also known as manslaughter
• Claims made by creditors when the company fails to meet its financial obligations

What Does D&O Insurance Not Cover?

While D&O insurance provides coverage for a variety of instances, it does not cover certain actions or their resulting lawsuits.

• Lawsuits between officers or directors
• Intentionally fraudulent acts Directors and officers commit
• Intentional criminal acts that Directors and officers commit
• Directors and officers receiving illegal payments or other personal gains
• Claims from a time that predates the policy purchase
• Regulatory authority fines and penalties

How Much Is Directors and Officers Insurance?

Most companies opt for a $1 million policy. The cost averages between $5,000 and $10,000 for that coverage. Each additional increment of $1 million will cost less. So a $3 million policy won’t necessarily cost $30,000. Your price will vary based on the coverage options you select. 

The more income your company has, the more the insurance coverage will cost. That’s because you face greater risks of high settlement costs. Additionally, some industries, such as financial and manufacturing institutions, are inherently more risky to insure.

Does Your Business Need a D&O Policy?

The most common reason to seek a D&O policy is if you’re planning to seek venture capital or other investor funding. Most investors will not want to be a part of your organization if you don’t have this insurance coverage.

Additionally, organizations working to attract the best directors will need D&O coverage to protect those directors. Otherwise, the potential directors will be hesitant to join your board of advisors because it puts their assets at risk.

Compare the Best Directors and Officers Liability Insurance From Benzinga’s Top Providers

Compare policy options from these leading insurance providers to get quotes and find the coverage you need.

Protect Your Organization and Its Leaders

Directors and officers insurance is crucial for organizations looking to build a board or attract investors. Review your coverage options and business insurance to ensure you and your leaders are covered in case of lawsuits.

Frequently Asked Questions