While businesses typically focus on the risks to their assets and revenue, often overlooked are the potential risks to board members, directors and officers. These people are another key business asset to be protected with the right level of insurance. As part of our business insurance deep dive, we look at the risks directors and officers are exposed to, how insurance can cover them and a variety of commonly asked questions about this coverage type.
What is directors and officers liability insurance?
Directors and officers liability insurance, often called D&O insurance, is a type of insurance policy that provides financial protection for the directors and officers of a company against claims made by stakeholders for alleged wrongful actions or decisions made by the directors and officers while performing their duties. These claims can include fraud, mismanagement, or other forms of misconduct and alleged wrongful acts.
Do you need directors and officers liability insurance?
Whether or not a company needs directors and officers liability insurance depends on various factors, including the size and complexity of the organization, the nature of its business, and the potential risks it may face.
Generally, larger or publicly-traded companies may be more likely to need D&O insurance, as they may be at a greater risk of facing claims from shareholders or other third parties. Additionally, companies that operate in specific industries, such as finance or healthcare, may also be more likely to need D&O insurance due to the regulatory and compliance risks they may face.
As always, it’s best to consult a professional insurance broker to discuss a company’s specific needs and whether D&O insurance would be appropriate. A professional can also advise on the specific coverage and limits necessary for a particular organization.
Do Small Businesses Need D&O Insurance?
Small businesses may also benefit from having directors and officers (D&O) liability insurance. While small businesses may have fewer assets and not be as high-risk as larger, publicly-traded companies, private companies can still be vulnerable to allegations of wrongful actions or decisions made by their directors and officers. D&O insurance can help protect the personal assets of business owners and managers in case of a lawsuit.
Furthermore, small businesses may also face regulatory and compliance risks, and D&O insurance can help to cover the costs of legal fees and any settlements or judgments that may arise from such claims. Additionally, if a small business is planning to go public or seeking the financial backing of investors, D&O insurance may be required by the investors or by law.
An example of when a small business may need D&O insurance is if the company faces a lawsuit from an employee claiming that the company’s management wrongfully terminated them. The employee may claim that the decision to terminate their employment was made recklessly or with malice and may seek damages from the company, its directors, and its officers. In this scenario, D&O insurance would help to cover the legal costs and any settlements or judgments that may arise from the lawsuit, protecting the personal assets of the business owners and managers.
Is directors and officers insurance needed for nonprofits
Directors and officers (D&O) insurance is typically recommended for nonprofit organizations, just like for-profit companies, as it can protect the personal assets of the organization’s directors and officers from financial losses related to wrongful acts they may commit while in their corporate roles. Non-profit companies may face similar risks and liabilities as for-profit companies, including securities claims, employment practices, regulatory investigations, and fraud and mismanagement.
Nonprofit organizations are also subject to the same laws and regulations as for-profit companies, and stakeholders and volunteers can sue them just like for-profit companies. D&O insurance can protect against such lawsuits, which can be costly to defend and harm the organization’s reputation.
How much does directors and officers insurance cost?
On average, D&O insurance can cost anywhere from a few thousand to tens of thousands of dollars per year for a small to medium-sized company. For larger public companies, the cost can be much higher. How much coverage you require is a factor of your company size and risk exposure, the level of coverage you choose is one of the bigger factors affecting insurance costs.
Ultimately, as with all insurance policies, it’s a case of the risk landscape in the eyes of your insurance company. Is your company or organization involved in activities that expose it to criminal and regulatory investigations, and do the decisions of your board members have the potential to break local laws or cause legal action.
It’s important to note the cost of D&O insurance can fluctuate depending on the current state of the economy and the overall level of risk in the marketplace.
What does directors and officers insurance cover?
Directors and officers (D&O) insurance is designed not just to protect corporate assets but also the personal assets of directors and officers of a company from financial losses related to wrongful acts they may commit while in their corporate roles.
This type of insurance covers a wide range of potential liabilities, including, but not limited to:
- Securities claims: D&O insurance covers claims made by shareholders or investors alleging that the directors and officers of the company made false or misleading statements regarding the company’s financial performance.
- Employment practices: D&O insurance can also cover claims made by employees for wrongful termination, discrimination, or harassment.
- Regulatory investigations: D&O insurance can cover the costs of legal defense and settlements arising from investigations by regulatory bodies, such as the Canadian Securities Administrators (CSA).
- Fraud and mismanagement: D&O insurance can cover financial losses caused by fraud or mismanagement committed by the directors and officers of the company.
- Conflicts of interest: D&O insurance covers claims of conflicts of interest. Directors and officers have a fiduciary duty to their company or organization. Essentially, they are required to hold their organization’s financial interest above their interest.
A comprehensive directors and officers liability will also cover any liability claims against former directors once the policy was in effect during the period the claim is alleged to have occurred.
It’s important to note that even if a suit or claim is unfounded, your liability insurance protects you in the face of steep defence costs. Insurance companies offer different coverage so it’s essential to discuss what is covered by your policy with your broker.
What does directors and officers insurance not cover?
Directors and officers (D&O) insurance is designed to protect the personal assets of directors and officers of a company from financial losses related to wrongful acts they may commit while in their corporate roles, however, like all insurance policies, there are specific exclusions that D&O insurance does not cover. Some examples of typical exclusions in D&O insurance policies include:
- Illegal activities: D&O insurance generally will not cover losses resulting from illegal activities, such as embezzlement or fraud, that are committed to cause harm.
- Bodily injury or property damage: D&O insurance typically does not cover losses related to bodily injury or property damage caused by the company’s operations. Other forms of business insurance are required in these cases, for example, commercial general liability insurance.
- Employee actions: If the actions of a companies employees cause harm, damage or injury to a party, D&O insurance would typically not cover this. Again, CGL is likely required, or in the case of professional services, an professional liability insurance policy.
- Prior acts: Some D&O insurance policies exclude coverage for losses related to wrongful acts that occurred before the policy was put in place.
- Punitive damages: D&O insurance policies generally exclude coverage for punitive damages, which are designed to punish wrongdoers rather than compensate for actual losses.
It’s important to note that D&O insurance policies can vary in terms of exclusions and coverage, so it’s important to work with an insurance broker or agent and carefully review the terms and conditions of the policy to ensure it meets the specific needs of your company.
In conclusion, Directors and officers (D&O) insurance coverage is a type of liability insurance designed to protect the personal assets of a company’s directors and officers from financial losses related to wrongful acts they may commit while in their corporate roles. Any company or nonprofit organizations governed and controlled by a board of directors and board members, from non-profits to businesses, needs comprehensive D&O coverage.
With the ever-changing business environment and directors and officers increasingly held accountable for in civil and corporate law, D&O insurance has become an essential component of any company’s comprehensive risk management strategy.
Frequently Asked Questions – Directors and officers insurance
Does directors and officers insurance cover employees?
Some D&O insurance policies may also cover certain types of employee claims. For example, D&O insurance can cover claims related to wrongful termination, discrimination, or harassment committed by the company’s directors and officers. However, it’s important to note that this coverage is typically limited and may not extend to all employee claims.
Employment Practices Liability Insurance (EPLI) is a different type of insurance that covers explicitly claims arising from wrongful employment practices, such as discrimination, sexual harassment, and wrongful termination. An organisation should consider purchasing D&O and EPLI insurance if it wants to cover all employment-related claims.
Is directors and officers insurance claims made or occurrence based?
A claims-made policy provides coverage for claims made during the policy period, regardless of when the wrongful act occurred. This means that if a wrongful act occurred before the policy was in place, it will not be covered under the policy, unless the organization has purchased prior acts coverage, which may be available as an endorsement.
On the other hand, an occurrence-based policy provides coverage for wrongful acts that occurred during the policy period, regardless of when the claim is made. This means even if a claim is made after the policy has expired, the organization will still be covered if the wrongful act occurred during the policy period.
It’s important to note that claims-made policies tend to be less expensive than occurrence-based policies. Still, they may leave the organization exposed to greater risk if a claim is made after the policy has expired. Occurrence-based policies, on the other hand, provide broader protection, but they tend to be more expensive.
Does directors and officers insurance have any other benefits?
Yes, aside from covering potential claims, having adequate coverage in place for your board can ensure you keep your organization attractive to prospective board members or investors. From their perspective, with the right coverage in place to protect them from being personally sued, you as an organization have their best interests at heart. Rather than leaving them with the risk of facing personal financial loss and costly litigation.
Who pays for D&O Insurance?
Typically the organization pays for the policy on behalf of their directors, officers and board members.