Whether you operate in the non-profit, public or private sector, having a Directors & Officers insurance policy can cover the cost of legal fees and compensatory damages when you need it. When added to your commercial policy, it can help to protect your business financially in the long run. Let’s take a closer look at what D&O insurance is, what it covers and how it can help protect your interests.
Definition of D&O insurance
Directors and Officers liability insurance, also referred to as “D&O insurance”, protects corporate directors and officers in the event that they are personally sued for actual or alleged wrongdoing when managing a company. The insurance helps cover defense costs and damages (i.e. awards and settlements) arising out of wrongful action allegations and lawsuits.
As a business owner, it is important to have a risk management plan. Directors, officers and organizations are held accountable to their investors and shareholders for the financial management of the company they work for. Taking strategic risks for the growth of your business is important to stay competitive. However, sometimes the choices you make can impact your business negatively, which can put you at risk of being sued.
Who needs D&O insurance?
D&O insurance will provide coverage for the directors, officers, managers and employees for lawsuits brought in that allege they were not sensible and financial harm was the outcome. So, what sorts of companies should have it? Most types, actually. Whether yours is a private company, a public company, a non-profit organization or a financial institution, D&O insurance coverage should be a key part of your strategic business plan.
What does D&O insurance cover?
Directors & Officers liability insurance serves as protection for individuals, their spouses and their personal assets from losses if there are claims made against them by employees, competitors, investors, customers or vendors.
According to TCIM.ca, Director & Officers insurance is intended to:
- Protect the personal assets of the individual director or officer, where they are not indemnified under the company’s by-laws.
- Indemnify the corporation for its own responsibilities under the by-laws to indemnify (where permitted) its Directors and Officers for expenses or losses incurred by them.
Categories of claims
Claims filed against directors and officers of a company can be broken down into three categories:
- Bankruptcy: After you file for bankruptcy, you would be held personally liable for the unpaid wages of your employees.
- Employee allegations: Employees may file a claim citing that your management team created a hostile work environment, violated regulations and/or gave poor governance to its staff.
- Financial misrepresentation: Investors hold Board of Directors liable after your business reports detail financials incorrectly.
A typical D&O insurance package covers the cost of legal fees and other costs associated with a lawsuit (e.g. losses, indemnification), against a director or officer of your business. This can include:
- Breach of fiduciary duty
- Lack of corporate governance
- Misuse of company funds
- Failure to comply with workplace law
- Accusations of reporting errors
- Theft of intellectual property
- Claims that you lured away key employees
- Poaching customers from another business
- A company’s financial loss
- The decision to sell or merge a company
- Financial loss of investors due to bankruptcy
Three clauses in a D&O insurance policy
Insurance companies typically offer D&O liability policies with three different clauses to cover various contingencies: Side A, Side B, and Side C:
1. Side A
For when a business is unable to pay the damages, so the Directors and Officers are held personally liable.
Example: Bankruptcy. This would help provide lost wages, cover legal fees and protect your personal assets.
2. Side B – Company reimbursement
For when a business is unable to pay the damages, the company is held liable.
Example: If employees sue your management team for poor governance, your insurer can reimburse the corporation for the expenses involved in defending the Directors and Officers.
3. Side C – Entities coverage
For when the corporation is held liable, along with the Directors and Officers.
Example: Public companies. This would apply to security claims.
Speak with an isure representative to discuss if you should add any or all of theses clauses to your policy.
What is excluded from D&O insurance?
A D&O insurance policy will not cover defense costs or settlements if the individual is found guilty of:
- Fraud and/or criminal activity
- Willfully lying or providing inaccurate information
- Pending/prior litigation
- Bodily injury or property damage
FYI: Cases for bodily injury and property damage are not covered under D&O insurance. For that, you need a Commercial General Liability policy.
How much does Directors & Officers insurance cost?
D&O insurance costs can vary, depending on several factors:
- The size of the business or organization
- How many board members/executives that will be on the policy
- The sector the business operates in, such as finance, oil, energy, etc.
- The amount of revenue the business handles annually
- Number of employees
- Experience – The more experience you have in your industry, the less you will need to pay for D&O insurance
- Business insurance history
The average cost for a small business might be around $1,000–$2,000 annually. As part of a larger organization, you can pay in the tens of thousands for coverage to protect your business.
FAQs about D&O insurance
Does D&O protect former Directors & Officers?
Yes, most insurers extend their D&O coverage to protect former directors and officers. So, if a director left your company a few months ago, but a lawsuit against their past actions recently came to light, your business insurance should continue to pay for the damages and fees involved.
What’s the difference between E&O insurance and D&O insurance?
- Errors & Omissions (E&O), or Professional Liability insurance, protects your business employees if they’re held liable for the results of their actions or advice. It can help pay for any legal fees and damages.
- Directors & Officers (D&O) insurance specifically protects your high-ranking employees in the event they’re held personally liable (or along with the business) for their actions, including negligence and mismanagement.
Is D&O insurance mandatory?
Although D&O liability insurance is not mandatory, it is a vital part of corporate governance. As such, you should consider adding it to your commercial policy, as it protects your directors and officers against any personal liabilities.
Does D&O cover wrongful termination?
It includes coverage for claims due to both actual behaviour and allegations of wrongful behaviour, even when liability is unclear. The most frequent sources of claims that you would be exposed to are related to employment issues involving sexual harassment, discrimination or wrongful termination.
As always, if you’re looking to change or add a D&O insurance policy to your business coverage, please contact your isure broker today!