Directors and Officers

What does D&O insurance not cover?

Directors and officers liability insurance deals with claims about how a company is managed, which means that certain types of losses fall outside that scope:

• Claims related to physical injuries or damaged property

• Allegations of financial loss tied to professional services or advice

• Claims where one insured person brings a claim against another insured under the same policy (insured vs. insured)

• Environmental claims

• Fraud or intentional wrongdoing

• Contract disagreements

D&O vs. E&O vs. EPLI

When you insure your organization, different liability policies respond to different risks.

• Directors and officers (D&O): This protects leadership decisions against claims that question how the organization was managed or governed.

• Errors and omissions (E&O): This covers claims arising from a client who alleges that advice, recommendations or services caused financial harm. (professional liability insurance)

• Employment practices liability (EPLI): This responds to workplace-related allegations, such as wrongful dismissal or discrimination.

A BrokerLink advisor can help determine which combination of coverage fits your organization’s needs.

Examples of D&O liability claims

Each organization faces its own unique risks; however, the following are some of the more common D&O liability claims examples:

• Breach of fiduciary duty, such as statutory remittances that a board member can be personally liable for

• Wrongful employment practices

• Contract disputes

• Copyright infringement

• Discrimination

• Failure to adhere to bylaws

• Inferior corporate leadership, according to professional or industry standards

• Legal or regulatory compliance failure

• Mismanagement of funds

• Passing executive decisions without proper authority

• Slander or defamation

Claim example: wrongful dismissal

A senior executive’s employment was terminated after several employees complained about her behaviour toward them, including harassment. The executive sued the organization for wrongful termination. Although the executive succeeded at trial, the insurer appealed the decision of the trial judge and won the appeal, with the result that no damages were paid to the executive. The total defence costs incurred were approximately $175,000.

How does D&O insurance work in practice?

D&O insurance is written on a claims-made basis, which means the insurance policy that is active when a claim is made is the one that responds to it, provided the alleged act occurred after the policy’s retroactive date.

1. An allegation is made

A D&O claim often begins with a written demand, lawsuit or formal investigation. Even if the events in question happened years ago, once a claim is made, you need to understand exactly what is being alleged and when the claim was first made.

2. Notice is provided

Make sure you contact your insurance company or broker as soon as possible. D&O policies are written on a claims-made basis, which means timing matters. The longer you wait, the more complicated the process can become.

3. Defence begins

Once a claim has been opened, legal counsel will typically be involved. It’s important to maintain open communication with your insurer and legal representatives throughout the process. If a claim involves both covered and uncovered issues, allocation provisions will determine how expenses are shared.

4. Resolution

The claim may be dismissed, settled or resolved in court. If coverage applies, your policy can help cover defence costs and certain settlement amounts, subject to your limits and retention.

If a company is acquired, merges or ceases operations, an extended reporting period (ERP), often called tail coverage, may be purchased. This allows claims to be reported after the policy ends for acts that occurred while it was still active. If you’re unsure how your current D&O policy would respond, a BrokerLink advisor can help you review it before a claim ever arises.

Does my company need directors and officers liability insurance?

Directors and officers liability insurance benefits companies of all sizes and industries. Whether a corporation is publicly or privately held or a not-for-profit, it’s necessary to secure your corporate leadership from exposure to liability claims that impact top talent, company finances and even long-term survival in the face of negative PR and the risk of losing investor confidence.

Understand your risks

Directors and officers have an obligation to perform their duties with care and prudence. If lawsuits are filed due to a failure to provide appropriate practices and procedures, there may be steps you can take to mitigate your risks proactively, such as:

• Seeking legal advice for proper termination of employees

• Ensuring financials are accurate and up-to-date

• Securing and backing up the personal information of employees and clients on a secondary secured source

• Creating a company harassment policy and regularly training new and existing employees on the policy

How to choose your limits and retention

Choosing the right limits and retention for directors and officers liability insurance is an important part of protecting your organization’s leadership. The amount of coverage you select should reflect the size of your organization, the number of directors and officers, your industry and the level of exposure you may face from shareholders, employees, regulators or other third parties.

Liability limits

Organizations with higher revenues, more complex operations or a larger number of stakeholders often consider higher limits of liability. Smaller private companies or non-profit organizations may choose more modest limits based on their structure and risk profile.

Benchmarking against similar organizations in your industry can provide a general reference point. However, limits should be selected based on your own governance structure and exposure, in consultation with a knowledgeable insurance advisor.

It is also important to understand that defence costs are typically included within the policy limit. Legal fees and related expenses reduce the total amount of coverage available to pay settlements or judgments. Some industry reports note that expert witness fees alone can account for up to 25% of total defence spending.

Retention

Retention, sometimes referred to as a deductible, represents the amount your organization must pay before insurance responds. Higher retentions can reduce premium costs, but they also increase the amount you must absorb if a claim arises.

Some organizations may also consider co-insurance provisions or Side A difference-in-conditions coverage to address specific gaps in protection. A BrokerLink advisor can help you evaluate these options and determine what makes the most sense for your organization.