Directors & Officers (D&O) Liability insurance protects the organization, board members, directors, executives, spouses and employees from losses related to:
- Breach of contract
- Wrongful interference with a contract
- Unfair trade practices
- Consumer protection violation
- Mismanagement and breach of fiduciary duty
- Securities fraud connected with private placement
- Misrepresentation in the sale of part or all of your company
- Failure to deliver services
- Regulatory actions by agencies such as FDA, FTC, SEC or IRS
- Self-dealing and conflicts of interest
Under the D&O policy, one of the most important components is the description of a Wrongful Act. The most common definition includes: “act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by an Individual Insured, Private Company or Individual Insured serving for an Outside Entity”.
In general there are three different types of D&O policies:
- For-Profit Private
- For-Profit Public
The main parts of a D&O policy are:
- Side A
- Side B
- Side C
Protects individuals for liability which is not reimbursed by the company.
Protects the company for their indemnification of the directors and officers’ liabilities.
Protects the company itself.
In a 2015 report by the Insurance Information Institute, it was shown that $1.5-4.7M was the average amount spent on defense and settlement expenses for Directors & Officers liability claims. If you or your business possesses a D&O exposure, you may be surprised by the availability of competitive prices for this insurance coverage. Each policy may contain important coverage considerations, so it’s important to carefully review each policy detail and be sure it matches your needs.
When switching from one carrier to another, be sure the Retro date is matched by new carrier. Also, when initiating coverage, always try to obtain “full prior acts” coverage – this will ensure that any past activities are covered if they generate a claim later.
Criminal or Intentional Acts
Most D&O insurance policies exclude criminal acts, but this can leave the entity vulnerable to losses. It is almost impossible to buy coverage for criminal or intentional acts, but we advise buying a policy with generous defense coverage.
Most D&O insurance policies also exclude self-dealing claims, but again, you should try to find a policy with broad defense coverage, especially for the sake of the entity. This usually involves wording within the exclusion that allows defense coverage until the “final decision” or something similar.
Ideally, your D&O insurance policy will provide coverage for liability arising from your exposure to involvement with entities outside your own.
For example, many executives may sit on boards for other companies or non-profits and this may indirectly benefit their own organization. It is preferable to provide coverage for these outside exposures.
Insured vs Insured Exclusion
Insureds suing each other are usually not insurable under the D&O policy. The best D&O policies will allow Employees to be considered “Insureds”, but will still allow coverage if they bring suit against other board members, executives or the entity.
Also, minority, non-voting shareholder claims are usually covered – be sure of this if you have this exposure.
Failure to Comply with Contractual Requirements
Contracts with customers often require the procurement of insurance your organization may not already have or it may require higher limits or certain endorsements. If the organization fails to act on the contractual requirements, the executives and board members can be held liable for the uninsured losses.
Your D&O insurance policy may exclude these exposures, but it’s best to purchase a policy which includes coverage for this risk, especially if you are part of a high growth company where new vendor contracts are being signed regularly.
Directors & Officers Liability Insurance, clearly, won’t protect you from every type of exposure your business may face. As a result, there are other types of insurance designed to meet your entire needs.
Here are a few:
- Commercial General Liability
- Commercial Property
- Business Owners Policy
- Professional Liability
- Employment Practices Liability
- Fiduciary Liability
- Business Auto Liability
- Workers Compensation
- Cyber Insurance
- Flood Insurance
- Commercial Umbrella
- Surety Bonds
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