Directors and officers insurance covers the legal costs when your business’s board members, directors, or officers are sued over decisions they made on behalf of your company.
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.
Example: An employee who works closely with the board of directors at a project management company sues a board member for causing emotional distress. The board member settles with the employee out of court, and D&O insurance pays the full settlement.
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.
Example: A software development company acquires a competitor, but fails to turn the struggling business around. Shareholders sue the board of directors, claiming they didn't adequately research the company before they approved the deal. D&O insurance helps the board mount a legal defense against the claims.
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.
Example: A board member at an app development company accidentally gives a competitor insider advice in violation of the non-compete clause in the company’s bylaws. Other board members find out and file a lawsuit. The company’s D&O insurance helps the accused board member pay for her legal defense, including the judgment.
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.
Example: A software company designs a new patient management system for a hospital, based on direction from the company's board of directors. However, the system fails to comply with HIPAA. The hospital sues the software company's board over the mistake.
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.
Example: Under the guidance of a board member, a digital marketing agency launches a marketing campaign that includes inaccurate market share statistics about a competitor. The competitor sues the board member over his role in launching the libelous campaign.
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 policy doesn’t cover wage theft, embezzlement, fraud, insider trading, money laundering, or other crimes.
Example: The chief executive at an IT staffing company embezzles hundreds of thousands of dollars from the company over several years. When the company discovers the crime, the chief executive can’t turn to D&O insurance to pay for his legal defense.
D&O insurance only protects your board members and officers. If an employee at your tech company makes a mistake that leads to a lawsuit, errors and omissions insurance (E&O) would cover those costs.
Example: An IT consultant recommends that a startup put all its effort into securing a single investor. When the investor falls through, the startup sues the consultant for negligence. The consultant's E&O insurance helps pay for his legal defense and court-ordered judgment.