Directors and officers (D&O) liability insurance protects the personal property and wealth of corporate directors and officers, and their spouses, in the event they are personally sued by employees, shareholders, vendors, competitors, investors, or other parties. These could be for actual or alleged wrongful acts while managing a company.
The insurance, which in some cases also protects the company, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers not responsible for losses due to their role in the company. However, corporate governance, corporate law, and the fiduciary duty owed to stakeholders and beneficiaries will still be accounted for and illegal acts or illegal profits will not be covered.
Directors and officers can be sued for a variety of reasons related to their company roles, including:
- Breach of fiduciary duty resulting in financial losses or bankruptcy;
- Misrepresentation of company assets;
- Misuse of company funds;
- Failure to comply with workplace laws;
- Theft of intellectual property and poaching of competitor’s customers, and;
- Lack of corporate governance.
Any business with a corporate board or advisory committee should consider investing in D&O insurance, including non-profit organizations. A company does not have to report revenues in the millions for its directors and officers to be personally sued over their management of company affairs. Smaller businesses with few assets may need protection just as much as large corporations.
A typical D&O insurance policy designed for privately held business may include three types of coverage:
- A-side coverage: This covers directors, officers, and sometimes employees, for defense costs, settlement fees, or judgements if the company cannot indemnify them, such as if the company has declared bankruptcy.
- B-side coverage: This covers the company for directors’, officers’ and employees’ losses when the company does indemnify them.
- C-side coverage: Also known as “entity coverage,” this coverage may reduce the limits available to protect the individual officers and directors, and financially protects the corporation.
Before accepting a seat on a board, directors and officers should ensure a company has the right D&O policy for their position by asking a trusted attorney to review the document. Stay tuned for part II of the blog, where we explain why having a D&O policy is vitally important.