Directors and officers insurance
Directors and officers insurance
Directors and officers insurance (D&O) protects board members and officers if they are sued for a decision they made on behalf of your company.
Why do you need directors and officers insurance?
Directors and officers insurance (D&O) is a type of management liability insurance. This policy safeguards your board members, directors, and officers from lawsuits over their management decisions.
If your board commits a breach of fiduciary duty, this policy ensures they won’t experience financial loss when defending themselves in court.
Most general liability insurance and errors and omissions insurance policies exclude lawsuits filed by stockholders, employees, clients, or regulatory bodies against your business' board members, directors, or officers. As a result, candidates for your board will usually require D&O insurance before they become members.
Not only is D&O coverage key for your company's risk management, but potential investors may require proof of coverage as part of their conditions for investing in your business.
D&O insurance provides protection for:
- Unethical employment practices
- Mismanagement or misrepresentation of funds
- Failing to follow corporate bylaws
- Failing to comply with industry regulations
- Intellectual property infringement or libel
What does directors and officers insurance cover?
D&O liability insurance covers legal costs when your company's directors, board members, or officers are sued over decisions they made on behalf of your company.
This includes:
Employment practices
Lawsuits over employment practices account for the bulk of D&O insurance claims. This policy protects your board members and officers when an employee sues over discrimination, harassment, wrongful termination, invasion of privacy, or mental and emotional distress.
Mismanaged funds
If a financial decision negatively impacts shareholders, they could sue your board members or officers for mismanagement of funds. D&O insurance helps pay the cost of their legal defense, including the cost of reaching a settlement or paying a court-ordered judgment.
Failure to follow corporate bylaws
Corporate bylaws define the rules that board members and officers must follow as they make decisions for your business. If a board member or company executive violates these rules, shareholders, employees, or other board members could hold them accountable by filing a lawsuit against them.
Failure to comply with industry regulations
If your company fails to comply with industry regulations meant to ensure the safety and privacy of your clients, a regulatory body can hold your board of directors or officers accountable. D&O insurance helps the accused parties pay legal defense costs, including settlements, judgments, or fines, in the event of a lawsuit.
Intellectual property infringement or libel
If a board member or officer makes a decision that leads to intellectual property infringement or libel, they could face a costly lawsuit from the affected party. D&O insurance covers the cost of mounting a legal defense, including the cost of paying a settlement or judgment.
How much does directors and officers insurance cost?
Directors and officers policyholders pay on average $138 per month, or $1,653 a year, for coverage. Your exact premium may be more or less depending on your risks.
The cost of directors and officers insurance is based on several factors, including:
- Policy limits
- Deductible
- Legal jurisdictions based on location
- Industry risk factors
- Number of employees and directors
- Revenue
- Claims history
- Potential for initial public offering
Who needs D&O insurance coverage?
Directors and officers liability insurance benefits a variety of small businesses that have an active board of directors or management team.
You may consider a D&O insurance policy if:
Your company has employees
If an employee makes an allegation of harassment, discrimination, or wrongful termination against your director, your business can lean on D&O insurance to cover the director’s legal fees, including a settlement or judgment for the employee.
Your small business has stockholders
If your board makes a management decision that negatively affects your stockholders, they could be accused of misusing company funds. D&O insurance covers the cost of reaching a settlement with stakeholders or, if need be, taking the case to court for a judgment.
Your company has a compliance officer
If your compliance officer doesn’t adhere to industry regulations, a regulatory body could file a lawsuit against that officer. D&O insurance helps your business cover legal expenses, including court fees, attorney's fees, fines, and other claim-related costs.
What isn't covered by directors and officers insurance?
While directors and officers insurance provides vast coverage for your board of directors and officers, it also has some exclusions.
For instance, a D&O policy does not cover:
Criminal activity
If one of your board members or officers intentionally breaks the law, D&O insurance won’t compensate your business for any costs related to the offense. This includes wage theft, embezzlement, fraud, insider trading, money laundering, or other crimes.
Only fidelity bonds (a type of commercial crime insurance) protect your business from illegal employee acts, such as forgery, theft, or fraud.
Decisions made by employees
D&O insurance only protects your board members and officers. This coverage does not extend to your employees.
If an employee at your small business makes a mistake that leads to a lawsuit, errors and omissions insurance (also known as professional liability insurance) would cover those costs.
Director injuries
If a director or another member of your management team suffers an injury at work, D&O insurance won’t cover their medical expenses or lost income while they recover.
Instead, you would need workers' compensation insurance, which pays for medical bills due to on-the-job injuries and related lawsuits. Workers' comp coverage is required in most states for businesses with employees.
Client injuries
If a client slips and falls at your business and ends up breaking a bone, your D&O policy won't pay for their medical expenses and any resulting legal costs.
Instead, general liability insurance would provide you the financial protection against client medical fees and any legal expenses. Many landlords require small business owners to carry this policy in order to sign a lease.
Other common questions about D&O insurance
How do you get a certificate of insurance?
TechInsurance is a trusted insurance expert for all small business owners, including contractors and consultants, with extensive knowledge of the IT sector. Our licensed insurance agents are available to answer your questions and help you find the coverage that's right for your business needs.
With TechInsurance, you can easily download a certificate of liability insurance for your small business, often on the same day you buy D&O coverage or another insurance product.
This comes in handy for companies, consultants, and nonprofit organizations that need proof of insurance to sign a contract or a lease and don’t have time to call an insurance company for documentation. Clients and landlords may ask for a certificate of D&O insurance or other types of business insurance to show you’re insured.
How does directors and officers insurance work?
Your board members and officers are at constant risk for all sorts of lawsuits, including hiring and firing decisions, trademark issues, and mismanagement of funds. Without D&O insurance, they're left exposed without any insurance protection as general liability and professional liability policies do not provide coverage for these D&O risks.
If an employee or shareholder sues them, D&O insurance offers protection by covering major expenses, such as hiring for an attorney, judgments, settlements, and other costs related to the lawsuit.
A D&O insurance policy benefits your business because it ensures:
- Board members aren’t putting their personal finances at risk to work with your company
- Your business has the liquidity to compensate investors for mismanaged funds
- Your business is protected from claims made by stockholders, employees, clients, or regulatory bodies
Can my business bundle D&O insurance with employment practices liability coverage?
Yes. In fact, some insurance providers provide a discount when you bundle your directors and officers coverage with employment practices liability insurance (EPLI). This combined management liability insurance bundle offers key coverage against lawsuits related to management, employee rights, and decisions made by your executive team.
What is the difference between directors and officers coverage and management liability insurance?
D&O insurance is a type of management liability insurance. To fully protect your business, we recommend you bundle your D&O coverage with other types of management liability policies. Not only will this protect your executive team's personal assets at your company, but it can also help attract top talent by offering peace of mind that others may be seeking.
It's important to remember that D&O only covers risk related to decisions made by your board members and officers. To protect your managers and other employees at your business, you should consider getting other types of small business insurance policies.
What does side A, B, and C mean in D&O insurance?
A D&O policy consists of three insuring agreements between the policyholder and the insurance provider:
- Side A: Side A coverage offers financial protection to individual directors and officers who would otherwise have personal liability in the event of a lawsuit, including out-of-pocket expenses.
- Side B: If a business indemnifies its directors and officers, the business would pay for their legal expenses and would then receive reimbursement from the insurer.
- Side C: Also known as entity coverage, Side C only covers securities claims for public companies, while offering broader coverage for private companies and nonprofits.
Check with a TechInsurance agent to get the right coverage for the unique needs of your business.