D&O Insurance:

A Comprehensive Guide to Directors & Officers Insurance

What is directors and officers insurance?

Directors and officers (D&O) insurance, or directors and officers liability insurance, is a type of professional liability insurance. Particularly, this insurance protects directors, officers, and board members of a company against lawsuits and liabilities.  Additionally, it provides coverage to employees while serving as an officer in the firm. 

To begin with, the board of directors has a special duty to the company. Thus, they are in charge of making complicated and far-reaching decisions in the firm. If these decisions are doubtful, they can face lawsuits 

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    According to Discover D&O, D&O insurance is over seven decades old. Firstly, it started as personal financial protection insurance in the 1930s. 

    Director’s liability insurance is necessary for both profits as well as for non-profit organizations. However, this insurance does not protect the organization itself, but rather the directors and officers. Overall, this policy protects top-level employees against lawsuits by employees, partners, or clients.

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      What does D&O insurance cover?

      D&O insurance provides coverage for lawsuits against the board members of an insured company. Particularly, some of the most common charges are related to:

      • Misuse of company funds

        Firstly, chiefs are in charge of budgeting and  division of funds. If funds are misused, the directors are at fault for conducting wrongful acts.

      • Misuse of assets

        Secondly, directors are also in charge of managing the assets of the company. Therefore,they can be held personally liable if there are faults in managing these assets. 

      • Fraud

        Thirdly, D&O policy protects directors and executives in lawsuits related to fraud. 

      • Intellectual property theft

        Additionally, the board of directors has access to secrets of the organization. However, if they try to use protected processes and methods in other organizations, they will be held liable. 

      • Breach of workplace laws

        Lastly, the board of directors have to follow the same workplace laws as the other employees. Thereby, any breach of such laws might result in lawsuits against the directors.  

      There is a common misconception that director’s insurance is only necessary for public organizations. Public companies do have a higher chance of facing D&O claims due to high number of shareholders. However, even executives and directors in private companies face liabilities. 

      To begin with, this insurance does not cover bodily injury, property damage, or advertising damages. These coverages require a general liability insurance policy. Usually, D&O policy only covers financial losses and defense costs of the top-level employees. 

      For example, Netflix’s board faced a lawsuit in 2011 when they increased the pricing model after splitting the DVD rental and streaming services, causing existing users a 60% price hike. However, a report by Techcrunch showed that they learned from their mistakes, and took measures when they increased prices in 2014. 

      Particularly, this insurance is necessary for you if: 

      • You are looking for venture capital. Usually, investors will ask for D&O coverage as a form of protection for themselves. 
      • You want to retain or attract the best executives and directors. In this case, it will act as an incentive for  people unwilling to put their personal assets at risk.

      Common endorsements and exclusions of D&O insurance

      There are some common endorsements or exclusions in Directors and officers insurance policy . These include: 

      Retired directors and officers endorsement 

      The consequences of the decisions that the board takes can arise after the decision-maker leaves. Wherefore, this endorsement extends coverage to retired board members for lawsuits. 

      Advancement of defense endorsement 

      An advancement of defense endorsement obliges the insurer to pay defense costs to the insured . In absence of this endorsement, you could be forced to cover your defense costs.However, the insurer would pay you at a later date once case is over. 

      Prior or pending litigation exclusion 

      As a rule, a prior or pending litigation exclusion will remove coverage for claims of damages for lawsuits that are already in place when the policy is obtained.  

      Additionally, this exclusion is absolute, which means that coverage will be denied if the lawsuit has commenced before the effective policy period, even if the organization is unaware of it. 

      Fraud exclusions 

      D&O insurance will deny coverage for acts of intentional fraud and profiteering. The advancement of defense endorsement will compel the insurer to forward defense costs as they are incurred. However, they will ask for a refund if the defendants are found legally liable by the courts. 

      Major shareholder exclusions 

      D&O coverage is usually denied against lawsuits that arise from claimants with a significant percentage of the company (usually 10-15%). For the most part, this exclusion is added to discourage collusion or infighting within the organization.

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      Types of insurance that include D&O insurance policy

      D&O insurance is included in various industry-specific insurance packages. These include: 

      1. Church insurance
      2. Entertainment insurance
      3. Art insurance
      4. Nonprofit insurance
      5. Nursing insurance

      How is the premium decided for a D&O insurance policy?

      D&O coverage costs will vary depending on different factors. The underwriting guidelines differ from one type of industry to another, and even within similar types of businesses. 

      A few known factors that affect the premium of a D&O policy are: 

      Ownership model 

      The ownership model of an organization, whether it be private, public, or nonprofits, provides insight on the various D&O exposures it might face. Public corporations face higher premiums when compared to D&O insurance for nonprofits or private corporations. 

      Public organizations face the highest amount of D&O exposures, as numerous stakeholders closely monitor the share prices of these corporations. According to an article by Bloomberg, Rupert Murdoch’s News Corp’s directors agreed for a $139 million settlement for allegedly turning a blind eye to unethical business practices. 

      Type of business and experience 

      The type of business and the years of experience it has in its particular niche is hugely relevant to the premium. Businesses that focus on one core business model often pay lower premiums than companies that spread themselves thin across a variety of services. Complex business models or relative newcomers in high-risk industries such as financial services or energy generation face higher premiums, especially if the management is inexperienced. 

      International exposures 

      If a company generates any portion of its revenue overseas, it faces much higher premiums than a business that operates domestically. Cross-border litigations, especially involving multiple claimants, are mostly significantly costlier than domestic lawsuits. 

      History of claims 

      Organizations that have a history of D&O litigations and claims are liable for higher premiums compared to organizations that do not have any claims against them.

      What are some common D&O insurance claims?

      Directors and officers insurance protects them from lawsuits that name them individually, rather than ones against the company as a whole. As such, it covers defense costs and settlements that come from decisions of the board of directors. 

      A few common D&O claims include: 

      1. After filing for bankruptcy, a liquidator determines the cause of the bankruptcy is a decision taken by a few members of the board. As such, it brings a lawsuit against the named directors for mismanagement. D&O insurance protects the board in such cases. 
      2. A public company might face a D&O claim from shareholders for various reasons, including misleading statements, excessive compensation, conflicts of interest, insider trading, and more. D&O insurers provide coverage against such claims.
      3. Employees can also file cases against the board of directors for various transgressions, like wrongful dismissal, discrimination, sexual harassment, breach of contract, or similar situations. While employment practices liability insurance does cover similar cases, D&O insurance provides coverage if the defendant is a named member of the board, rather than the organization itself.
      4. When executives and board members make decisions that adversely affect the organization, the organization itself may sue the executives alleging damages, which is also a common claim for directors insurance.

      FAQs about D&O insurance

      Is D&O insurance the same as professional liability insurance?

      While D&O insurance and professional liability insurance have similar coverages, they are different based on who they insure. 

      Professional liability insurance indemnifies a whole organization, whereas D&O coverage insures individuals on the board and other top-level executives of the organization.

      Does D&O cover direct action lawsuits?
      Direct action lawsuits are litigations in which the shareholders sue the executives independently. On the other hand, a derivative action lawsuit is a lawsuit in which shareholders assume the role of the organization and sue the directors. 

      D&O insurance covers both direct action as well as derivative action lawsuits.

      Does D&O insurance overlap with other professional liability insurance?
      D&O insurance is complicated, but the policy usually has an exclusion that prevents claims if the claims fall under other professional liability coverages, such as malpractice or E&O claims. This clause is present to avoid double payment for the same claim through different policies.
      Are you looking for D&O insurance to protect your board of directors?
      Get quotes from multiple carriers for your business quickly and protect your executives from liabilities today!