Your leadership board is a powerful asset, but they’re not exempt from libel and lawsuits. With this in mind, it’s important to know how to protect them if trouble arises from a difficult decision — that’s where directors and officers insurance comes in.
We’ll explore the ins and outs of what directors and officers insurance covers, whether it’s right for a business, and what types of coverage exist.
What Is Directors and Officers Insurance?
Directors and officers insurance (also known as D&O insurance) is designed to cover the people who serve as directors and officers of a company in the event of a lawsuit. More specifically, it’s designed to protect leadership from personal losses if they are sued by an organization’s employees, vendors, customers, or other parties.
Is Directors and Officers Insurance Necessary?
While not required by law (like workers’ compensation), any business with a corporate board or advisory committee should consider investing in D&O insurance, including non-profit organizations. A company doesn’t have to have a large advisory board with directors and officers overseeing tens of millions of dollars for them to be personally sued over the management of company affairs.
If you don’t have D&O insurance, your directors, staff, and even volunteers (in the case of a nonprofit) could be at risk. Not adding D&O insurance to your commercial insurance coverage leaves your company open to lawsuits over perceived negligence, wrongful termination, and asset management.
Does Your Business Need D&O Insurance?
Essentially, any business with a leadership board should consider getting D&O insurance. Some small businesses are under the impression they don’t need it because they’re too small and unlikely to experience these types of claims. However, all organizations — whether public, private, or nonprofit — are vulnerable to D&O claims and should make sure they’re covered.
A 2016 survey reported that one in four private companies experienced a D&O claim throughout the course of a three-year period. In addition, the average reported loss from these claims was nearly $400,000.
The bottom line is this: if you’re asking if your business needs D&O insurance, then it probably does.
Different Types of D&O Insurance
- A-side coverage. This component of the policy covers directors, officers, and even employees (on occasion). It covers costs, settlement fees, or judgments if the company is not able to provide compensation, such as if the company declares bankruptcy.
- B-side coverage. This covers a business’s directors’, officers’, and employees’ losses when they can’t afford to compensate them.
- C-side coverage. This is also sometimes referred to as “entity coverage,” and it protects financially the corporation in its own right. Entity coverage (or C-side coverage) can reduce the limits available to protect individual officers and directors.
Regarding what’s right for you, it’s important to find a trusted insurance and risk management professional that will sit down and guide you through the process. Some questions your insurance and risk management company can walk through include:
- Should the policy cover the whole company or just directors and officers?
- Does the policy cover innocent directors and officers if one or more are found guilty of wrongdoing?
- Will the policy cover allegations of criminal misconduct up to the point of a final verdict on the matter?
- What policy limits (generally provided in $1 million increments) do I need?
Directors and Officers Lawsuit Examples
To help you better understand D&O insurance, let’s take a look at some real-world worst-case scenarios, and how D&O can help protect you in these circumstances.
Let’s say a business decides to cut certain employees so they can focus on areas of growth within the company. If one of the employees disagrees with the decision and declares the decision was based on internal politics, they could decide to sue certain executives.
This type of scenario actually happened to a NY Times CEO when the individual faced “a multimillion-dollar class-action lawsuit alleging that he introduced a culture of ‘deplorable discrimination’ based on age, race, and gender at the newspaper.”
In this event, combining D&O insurance with Employment Practice Liability will cover you when you and your executive team need to make difficult decisions.
Managing a small business is difficult. When you have to be the boss of so many things on your own, it’s easy to make innocent but critical errors. For example, what if you file your taxes incorrectly? Or, maybe you unknowingly break a few labor laws when hiring new personnel.
D&O insurance protects your management from failure to comply with workplace laws. Without it, these small but potentially costly mistakes could add up to a bigger mess.
Together with General Liability Business Insurance, D&O insurance can help protect a business from the “what ifs” and the mistakes that can accompany business management.
Failure to Perform for Investors
The saying goes something like this: seed funding makes a business grow. But the truth is, your investors are often your best friends until they’re not. If your new venture startup fails — or fails to meet investor hopes — what are you to do?
For instance, sometimes, an investor could take action to try to get the money they lost in a startup back. This puts your directors and officers at risk. D&O insurance will help protect your executive board and the company as a whole during difficult times.
Accusations Against Transparency
Directors and officers may be accused of a lack of transparency or a failure to disclose pertinent information. According to Bloomberg, companies can face litigation when “investors complain they missed out on bigger gains because they weren’t told about the good news that other shareholders, typically corporate insiders, and bigger backers, knew.”
Since D&O insurance will protect your directors and officers from exposure to personal liability should something go wrong, it’s a great tool to protect against shareholders, investors, clients, or partners accusing your business of being less than forthcoming.
Directors and Officers Insurance FAQ
Looking for something specific? We’ve addressed some frequently asked questions related to D&O insurance below.
Is Directors and Officers Insurance for a Small Business Necessary?
Yes, small businesses should seriously consider having D&O coverage. Since financial and employment mistakes are easy to make when you’re just starting out, it’s important to have D&O coverage to help protect you from lawsuits that are the result of innocent but critical mistakes.
How Much Does Directors and Officers Insurance Cost?
The cost of D&O insurance is based on a variety of factors. This includes, but is not limited to, your company’s revenues, whether you had prior legal claims, and the amount of debt your company or nonprofit may possess. However, D&O insurance is fairly inexpensive and can save you millions in the event of a lawsuit.
Is Directors and Officers Insurance for Nonprofits Unique?
A nonprofit doesn’t need a unique type of D&O insurance, but D&O insurance can protect a nonprofit in areas like:
- Mismanagement of funds or investments
- Employment issues, including harassment and discrimination
- Self-dealing (sale, exchange, or leasing or property to a disqualified person)
- Failure to provide services
- Failure to fulfill fiduciary duties
What Is the Difference Between Errors and Omissions Insurance vs. Directors and Officers Insurance?
D&O insurance protects your high-level decision-makers (i.e. directors and officers). E&O insurance covers acts, errors, and omissions committed by employees of a business.
What Type of Directors and Officers Insurance Should I Buy?
Our section above entitled “Different Types of D&O Insurance” will walk you through the ins and outs of A-side, B-side, and C-side coverage. The exact coverage you’ll need depends on your business model characteristics, needs, history, and finances. At Robertson Insurance & Risk Management, we can sit down and help you determine what’s best for your business.