Do I need directors and officers insurance?

13 minute read Published on Jun 7, 2017 by BrokerLink Communications

A group of employees discussing ideas while gathered around a table in a boardroom.

Running a business involves significant risks, especially when it comes to making crucial decisions. That’s where directors and officers (D&O) insurance comes into play. D&O insurance is a specialized coverage designed to protect the directors and officers of a company from legal liabilities that may arise from their managerial actions. At BrokerLink, we understand the complexities of business insurance and strive to find tailored solutions that match your unique needs. Our experienced team of insurance experts is here to guide you through the intricacies of directors and officers insurance, ensuring that your business and its leadership team are well-protected.

What is the purpose of directors and officers insurance?

As leaders of a company, directors and officers are entrusted with making important decisions that can impact various stakeholders, including employees, shareholders, and customers. Unfortunately, these decisions can sometimes lead to allegations of wrongdoing, negligence, or mismanagement. When faced with such claims, individual directors and officers can be held personally liable for financial damages, legal defence costs, and even regulatory investigations.

Directors and officers  (D&O) insurance steps in to provide a safety net for these key personnel. It offers coverage for legal defence costs, settlements, and judgments, helping to safeguard personal assets and preserve the financial well-being of directors and officers. Additionally, D&O insurance can also protect the company itself, as some policies extend coverage to reimburse the organization when it indemnifies its directors and officers.

What does directors and officers insurance cover?

Directors and officers insurance provides coverage for the personal liability of directors and officers of a company in the event they face lawsuits or claims related to their managerial decisions and actions. The specific coverage can vary based on the policy, but typically, D&O insurance includes the following:

Directors and officers liability insurance

D&O liability insurance covers the personal liability of directors and officers for lawsuits and claims related to their managerial decisions and actions, providing financial protection for legal defence costs, settlements, and judgments.

Legal defence costs

D&O insurance covers the expenses incurred in defending directors and officers in lawsuits or legal actions, including attorney fees, court costs, and other legal fees.

Employment practices liability

This coverage component protects directors and officers against claims arising from employment-related issues, such as wrongful termination, discrimination, harassment, or retaliation.

What are the three clauses in a D&O insurance policy?

In a directors and officers insurance policy, there are three key clauses that typically exist to define the scope of coverage and how claims are handled: Side A coverage, Side B coverage, and Side C coverage.

Side A coverage

One essential aspect of D&O insurance is the inclusion of Side A coverage, which focuses on the personal protection of directors and officers. This component comes into play when the organization is unable to indemnify its directors and officers or when indemnification is legally prohibited. In such situations, Side A coverage acts as a safety net, ensuring that directors and officers have financial protection for their personal assets when facing legal actions related to their managerial decisions and actions.

Side B coverage

Side B coverage serves to reimburse the organization itself when it indemnifies its directors and officers for legal expenses and settlements. This coverage alleviates the financial burden on the company, which may arise from providing indemnification to its leadership team. By having Side B coverage in place, organizations can confidently support their directors and officers during legal proceedings while safeguarding their financial stability and resources.

Side C coverage

Side C coverage, often referred to as “entity coverage,” extends protection to the company itself in certain specific situations. One common scenario where Side C coverage is relevant is in shareholder derivative lawsuits. These lawsuits are brought by shareholders on behalf of the company against its directors and officers, alleging harm to the organization due to their actions or decisions. Side C coverage steps in to shield the company from financial losses resulting from such lawsuits, ensuring that the organization’s interests are safeguarded.

By customizing your D&O insurance policy with BrokerLink to suit your specific needs, we can help you navigate the complexities of today’s business environment with greater confidence and resilience by knowing you have adequate protection for both your directors and officers and the organization as a whole.

What does D&O insurance not protect my organization from?

While Directors and officers  insurance provides crucial protection for certain types of liability risks faced by directors and officers, it does not cover everything. There are specific exclusions and limitations in a typical D&O Insurance policy. Some common situations and liabilities not covered by D&O Insurance include:

  • Intentional illegal acts, such as fraud or criminal activity

  • Bodily injury and property damage

  • Professional liability coverage

  • Third-party liability coverage

How does D&O insurance help my organization?

Directors and officers  insurance is a critical safeguard that empowers your organization by providing essential protection to your leadership team. This specialized coverage shields individual directors and officers from personal liability, ensuring their personal assets are secure when faced with legal actions arising from their managerial decisions.

With D&O insurance in place, your organization can attract and retain top talent, enhance corporate governance practices, and mitigate reputational risks. Moreover, it minimizes the financial strain of legal defence costs, allowing your business to focus on growth and success.

Here’s how D&O insurance can bolster your organization’s resilience and provide the peace of mind needed to navigate the complexities of today’s business landscape:

It protects the personal assets of directors and officers

D&O insurance shields the personal assets of individual directors and officers from financial losses in case they are personally sued for alleged wrongful acts or management decisions. Without this protection, directors and officers might hesitate to take on leadership roles due to the fear of personal liability.

It helps attract and retain top talent

Offering D&O insurance demonstrates a commitment by the organization to protect its leadership team. This can be a significant factor in attracting qualified and experienced individuals to serve as directors and officers. It also helps retain existing executives, ensuring stability in the management team.

It aids in minimizing legal costs

Defending against allegations can be a costly process, involving attorney fees, court costs, and other legal expenses. D&O coverage provides financial support to cover these defence costs, allowing the organization to focus on its operations without facing a severe financial burden.

It assists with mitigating reputational risks

A lawsuit or publicized legal action against directors and officers can harm the organization’s reputation. D&O insurance can assist in managing the fallout by providing access to crisis management resources and public relations expertise, helping to mitigate reputational risks.

It safeguards shareholder interests

Shareholders and stakeholders can sue directors and officers if they believe their actions have negatively affected the company’s value or performance. D&O coverage can provide indemnification and financial protection, ensuring that shareholder interests are safeguarded.

It enhances corporate governance

Knowing that D&O insurance, will cover them may allow executives to make more informed and diligent decisions, leading to improved corporate governance practices within the organization.

It helps with addressing regulatory scrutiny

Companies may face investigations and inquiries from regulatory authorities, particularly in areas like compliance and financial reporting. D&O coverage can help cover the costs associated with these investigations and provide support during the resolution process.

It protects the organization

Some D&O policies extend coverage to the organization itself when it indemnifies its directors and officers. This helps protect the company’s financial interests and assets.

What are some examples of D&O claims?

D&O insurance is a crucial form of coverage that shields executives and company leaders from personal liability when facing claims related to their managerial decisions. D&O claims can arise from a wide range of circumstances, reflecting the complexity of modern business operations and the potential risks directors and officers encounter in their roles. From allegations of financial mismanagement and breach of fiduciary duty to employment-related disputes and shareholder lawsuits, the examples of D&O claims illustrate the diverse challenges that corporate leaders may confront.

Every organization encounters distinct risks specific to its operations, but certain D&O liability claim examples are commonly observed. Some typical examples of D&O liability claims include breach of fiduciary duty, where board members could be personally responsible for statutory remittances; wrongful employment practices; contract disputes; copyright infringement; discrimination; failure to comply with bylaws; inadequate corporate leadership as per professional or industry standards; legal or regulatory compliance failure; mismanagement of funds; unauthorized executive decisions, and cases related to slander or defamation.

Do you need insurance to be on a board of directors?

Whether or not you need insurance to be a board member can vary depending on the organization and its specific bylaws, as well as the legal and regulatory framework in the country or region where the organization operates. In many cases, there may not be a legal mandate for directors to have insurance coverage, but it is strongly recommended and often considered a best practice.

Directors and officers (D&O) insurance is designed to protect individual directors and officers from personal liability in case they are sued for alleged wrongful acts or decisions made while serving on the board. This coverage can be crucial for attracting qualified individuals to join the board, as it provides financial protection for their personal assets.

In some cases, the organization’s bylaws may require board members to be covered by D&O insurance as a condition of their service on the board. Additionally, some investors or stakeholders may request D&O insurance as part of their due diligence process before investing in or supporting an organization.

Nevertheless, even when not legally mandated, having directors and officers  insurance is a prudent risk management practice for both board members and the organization. It can help attract experienced and capable directors who may be reluctant to take on the role without such protection. Moreover, it provides peace of mind for the directors, knowing that their personal assets are safeguarded in case of legal actions related to their board duties.

Do private companies need directors and officers insurance?

Directors and officers insurance is not exclusive to public companies; it also offers significant benefits for private companies or organizations. While public companies may be more commonly associated with D&O insurance due to their higher visibility and potential exposure to shareholder lawsuits, private companies face similar risks and potential legal liabilities. Having D&O insurance is a prudent risk management strategy that can protect the personal assets of directors and officers if they face legal actions related to their managerial decisions.

In addition to shielding directors and officers, D&O insurance is a valuable tool for private companies to attract and retain top talent on their boards. Offering this coverage as a part of the benefits package can be an enticing perk for experienced and capable individuals considering board service. Moreover, D&O insurance can significantly mitigate the financial burden associated with legal defence costs, settlements, and judgments in case of lawsuits, allowing private companies to focus on their core business operations without being hampered by unforeseen expenses.

Furthermore, D&O insurance provides an added layer of protection for stakeholders, such as investors, employees, customers, and suppliers, who might be impacted by alleged mismanagement or wrongful acts of directors and officers. Private companies, like their public counterparts, may also face regulatory scrutiny and potential investigations. D&O insurance can assist in covering the costs associated with these inquiries, ensuring that the company’s leadership team can navigate such challenges confidently. By customizing their directors and officers' insurance to suit their specific needs and level of exposure to potential risks, private companies can enhance their resilience and safeguard the interests of all stakeholders.

How much does directors and officers insurance cost?

The cost of directors and officers insurance can be influenced by a multitude of factors, making it difficult to provide a one-size-fits-all answer. The pricing is influenced by the unique characteristics of the organization seeking coverage, including but not limited to:

Size of the organization

The number of directors and officers covered by the policy can affect the premium. Larger organizations with more executives may face higher premiums because there is a higher likelihood of claims arising from their decisions and actions.

Industry and risk profile

The industry in which the organization operates plays a crucial role in determining risk exposure. High-risk industries, such as financial services or healthcare, tend to have more litigation and regulatory risks, leading to higher premiums compared to low-risk industries.

Number of voting and non-voting shares

The more shares outstanding, especially voting shares, the higher the risk exposure for directors and officers. As such, higher share ownership may lead to higher premiums for D&O insurance coverage.

Corporate structure

The legal structure and ownership of the organization can also affect the premium. For instance, private companies may have different risk profiles than public companies.

Considering these factors, organizations can opt to work closely with insurance brokers to obtain accurate quotes and tailor the D&O insurance policy to their unique needs. At BrokerLink, our insurance brokers leverage their industry expertise and relationships with multiple insurers to find the best coverage options at competitive rates. By striking the right balance between affordability and comprehensive protection, organizations can ensure that their board members are adequately covered in the event of legal liabilities and risks associated with their managerial roles. For further questions about cost and what you’ll need for your free business insurance quote, including building an insurance binder should you need immediate proof of D&O coverage, contact BrokerLink today.

Is there a difference between directors and officers (D&O) and errors and omissions (E&O) insurance?

Yes, there is a significant difference between directors and officers insurance and errors and omissions insurance, as they serve different purposes and cover distinct types of liabilities:

D&O Insurance provides coverage for the personal liability of directors and officers of a company. It protects them in the event they are sued for alleged wrongful acts, mismanagement, errors, omissions, or breaches of fiduciary duty while performing their managerial duties. D&O insurance focuses on claims brought against individual directors and officers, safeguarding their personal assets from financial losses resulting from lawsuits.

On the other hand, E&O insurance, also known as professional liability insurance, is designed to protect professionals and their businesses from claims arising from alleged negligence, errors, or omissions in the services they provide. This type of insurance is typically purchased by professionals such as lawyers, accountants, consultants, real estate agents, and other service providers. E&O insurance covers financial losses and legal defence costs when clients claim that the professional’s work or advice did not meet the expected standard of care.

Both types of insurance are crucial for different aspects of business protection, ensuring that both key personnel and professionals have the necessary professional services coverage to navigate potential legal risks in their respective roles.

When would my organization not need directors and officers insurance?

D&O insurance is a vital protection for many organizations, but there are instances where it might not be a top priority. Certain factors and situations may influence the decision not to pursue D&O insurance immediately. Here are some scenarios where D&O insurance may not be a top priority for your organization:

You run a small, family-owned business

Small family-owned businesses with a limited number of directors and officers, where the ownership structure is closely held within the family, may perceive the risk of personal liability as low. In such cases, the decision-makers may choose not to invest in D&O insurance, assuming that the familial relationships provide a level of trust and understanding that mitigates the need for coverage.

You run a nonprofit organization with volunteer directors

Non Profit organizations that have a board of directors consisting entirely of volunteers may have fewer concerns about personal liability claims. Since volunteer directors typically do not receive financial compensation for their services and may have legal protections under provincial  laws, the organization may decide that D&O Insurance is not a priority.

You handle low-risk business operations

Some organizations may perceive their industry or business operations as relatively low-risk, with a low likelihood of facing lawsuits or legal actions against their directors and officers. In such cases, the management may prioritize other types of insurance coverage that address more pressing risks relevant to their specific business.

You already have adequate indemnification agreements

If an organization has strong indemnification agreements in place, providing comprehensive protection to its directors and officers, it might consider relying on these agreements instead of purchasing D&O Insurance. However, it’s essential to understand that indemnification agreements alone may not provide the same level of financial protection as a D&O policy.

Nevertheless, the decision not to purchase D&O insurance should be carefully considered and based on a thorough assessment of the organization’s unique risk profile, its legal and regulatory environment, and its specific business needs. Even in scenarios where D&O insurance may not seem immediately necessary, as the organization grows or circumstances change, the need for coverage might arise. Contact BrokerLink to speak with one of our licensed insurance brokers to help you make an informed decision about whether to obtain D&O insurance based on your organization’s specific circumstances and risk tolerance.

How can a broker help?

There are many benefits of working with an insurance broker. Insurance brokers are experienced professionals who can conduct a thorough risk assessment of the organization. They identify potential liabilities and exposures faced by directors and officers, helping the company understand its unique risks. They also have access to a wide range of insurance markets and policies. They can compare different D&O Insurance options, including coverage limits, terms, and exclusions, to find the most suitable policy for the organization’s needs and budget. Brokers also have in-depth knowledge of the insurance industry, enabling them to explain complex policy language and provide valuable insights for informed decision-making.

Contact BrokerLink for a free directors and officers insurance quote today!