What does D&O insurance cover?
D&O insurance, or directors and officers liability insurance, will protect the personal assets of corporate officers, directors, and their spouses, should they be sued by customers, employees, investors, competitors, vendors, or other parties, for alleged or actual wrongful acts in managing a business. Typically, D&O insurance also protects the company, covering settlements, legal fees, and other costs. D&O insurance financially backs a standard indemnification provision holding officers not responsible for losses because of their role within the company. Many directors and officers may want a company to provide both D&O and indemnification insurance.
There are a variety of reasons officers and directors could be sued in relation to their company roles, including: misrepresentation of company assets; fraud; breach of fiduciary duty resulting in financial losses or bankruptcy; failure to comply with workplace laws; misuse of company funds; lack of corporate governance; and theft of intellectual property and poaching of competitor’s customers.
Generally, D&O insurance doesn’t cover illegal profits or illegal acts.
Why do I need D&O insurance?
D&O claims are not mostly a public company phenomenon – which is a common misconception. Public, private, and non-profit companies each face D&O litigation risks, according to a recent Towers Watson survey in the U.S. If your business has an advisory committee or a corporate board, you should consider purchasing D&O insurance, even non-profits. Your company’s officers and directors can be personally sued over their management of company affairs even if your company isn’t posting revenues in the tens of millions of dollars. It’s highly possible that your smaller business, with fewer assets, could require a similar type of protection as a large corporation.
Additionally, if you’re trying to secure funding or venture capital from an investor, you will likely require D&O coverage to protect the investor. D&O coverage will also protect you if you’re trying to attract and retain qualified directors who would otherwise be reluctant to risk their personal assets.
What does directors and officers insurance not cover?
The key when purchasing D&O insurance, like with any other policy, is to look at the exclusions. Like most policies, any excluded cause of loss is either covered by another kind of insurance or outside the scope of the purpose of the policy. D&O insurance won’t cover what are largely considered the worst acts of the officers or directors, including: fraud, malicious or criminal acts committed deliberately, or dishonesty. Insurance is designed not to cover intentional acts of the insured, but to transfer risk. If insurance did protect against intentional wrongdoing, it would, to some degree, encourage immoral behaviour. For this reason, those who draft D&O insurance provisions deem deliberate and intentional acts of insureds as outside the scope of the insurance.
D&O insurance doesn’t provide coverage for physical damage to a third party’s property or for bodily or personal injury – either of which falls under the scope of general liability policies. The majority of general liability policies will cover physical damage to a third party’s property, though occasionally at a lower limit. For these reasons, your non-profit should carry both general liability insurance and D&O insurance, when financially possible.
What is the difference between D&O and E&O insurance?
To fill in the gaps of an errors and omission (E&O) liability insurance policy, you may also need a directors and officers (D&O) liability insurance policy. For protection from claims of improperly performed services or claims of malpractice, you need E&O insurance, which is designed to protect your business from, specifically, failing to provide professional services and providing services in a way that caused financial damages or some form of harm to a client. In other words, E&O insurance protects the business itself, and any representative of your business, whereas D&O insurance protects a company’s officers and directors. Usually D&O insurance provides coverage for management’s decisions, this type of insurance can also apply to individuals that provide services to clients of the company, including negligence, financial damage, malpractice, and design flaws.
Does D&O insurance cover breach of fiduciary duty?
Yes. Public or private companies with a board of directors should have D&O insurance. The exposures that officers and directors are most vulnerable to include breaches of fiduciary duties, regulatory actions, allegations of misrepresentation, and securities litigation. When it comes to protecting a company’s executives and board members, D&O insurance fills the gap that umbrella insurance and general liability don’t’ cover.
Does D&O cover board members?
Yes. Directors and officers (D&O) liability insurance will help cover the settlements, defense costs, and judgements resulting from allegations of wrongful acts and lawsuits brought against a non-profit organization. Oftentimes, non-profits don’t realize their board members could be held personally responsible for the company’s actions. D&O liability insurance will provide protection for your organization’s mission – and your board member’s personal assets.
Is D&O insurance the same at professional liability?
Directors and officers (D&O) insurance is not the same as professional liability. D&O insurance covers decisions made by management, whereas professional liability insurance covers alleged malpractice in your business. For example: D&O would come into play if a hospital board was sued for hiring a doctor who cut out the wrong kidney of patient, but the doctor who did the cutting would require professional liability.