D&O Insurance: A Leader’s Armor for You

Risk management is integral to corporate governance. Given the rise of securities action lawsuits, increasing cybersecurity risks, or social issues such as #MeToo movements—Directors & Officers (D&O) face multiple risks while assuming their duty. A tiny mistake may lead to million-dollar litigation, which can wipe the personal assets of the D&Os. Fortunately, D&O insurance provides protection against such unfortunate situations.   

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What Does D&O Insurance Include?

D&O insurance is a specialized personal liability insurance for company directors, officers, board members, or managers. The insurance protects them and their spouses’ personal assets when suits are filed by investors, customers, employees, competitors, vendors, or other parties. Such lawsuits can arise from professional misconduct, errors, or negligence manifested in the actions or decisions taken within the scope of professional conduct. Additionally, the policy also reimburses companies if they had paid settlements to protect the insured executives from third-party claims. Hence, it is an excellent technique for companies to manage risks.

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Why D&O Insurance?  

The decisions and behavior of senior executives are more closely scrutinized than those of lower-level employees. Therefore, any mistake, error, or omission by D&Os can lead to lawsuits, exposing a company and the individual D&Os to potentially lose millions of dollars.

D&O insurance protects a company’s D&Os from exorbitant claims. One of the largest settlements paid out by D&O insurers was $240 million.  In 2019, Reuters reported that the insurers for the board members and executives of Wells Fargo paid a $240 million settlement because the D&Os breached their fiduciary duty. The top officials at the company had disregarded bogus accounts and failed to stop the creation of millions of fake accounts.

Adding to its significance, D&O insurance coverage can be a pre-requisite to secure funds from investors. The coverage assures venture capitalists or investors that the company and its D&Os can survive the financial crisis following possible litigations.

Furthermore, experienced D&Os may be reluctant to work for a company that does not have the coverage. Absence of the coverage means they will need to risk their personal assets. Hence, D&O insurance coverage can be a potential tool to attract and retain qualified D&Os.

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D&O Insurance Coverage Structure

D&O insurance has three types of coverage:

Side A: D&O liability

Suppose a third party files a suit against an officer of your company for an error they made. Your company may be unable to indemnify the officer for the loss following litigation. At such times, D&O insurance provides compensation and protects the personal assets of the officer. Hence, side A coverage protects the individual D&Os.

Side B: Company reimbursement 

Your company may pay for the lawsuit filed against one of your directors. Following which, D&O insurance reimburses your company for the legal and settlement costs incurred in the lawsuit against D&Os. This coverage protects your company and its corporate assets.

Side C: Protect the insured’s organization  

Side B and side C coverage are similar as they both protect your company and corporate assets. However, side C differs as it protects your company when lawsuits are filed against the company. The legal liabilities of the company are covered.

Determine the coverages you need in D&O insurance. An extra layer of side A coverage can be added to ensure that the individual D&Os personal assets are protected. If your company is privately owned or a non-profit organization, you can buy AB policies. As for public companies, the standard form of D&O insurance is ABC policies.

what does d&o insurance cover

What Does D&O Insurance Cover?

D&O insurance covers specifically for the following claims:

Wrongful Acts 

Wrongful acts in D&O insurance coverage refer to any action or decision that is perceived as being wrong by another party. Such acts can be actual or alleged negligence, errors, omissions, breaches of duty, and misstatements.

For instance, an officer of your company may unintentionally make a misleading statement about the company’s performance. Such statement can result in litigation from several parties. Fortunately, you will not have to bear the cost of such suits if you have D&O insurance.

Errors in Judgement 

For example, a company sells a special type of cooking sauce and promises that there will be no ill health-effects from its consumption. However, consumers start developing health issues and sue the company for disseminating false information. At such times, D&O insurance can help cover the litigation costs.

Other errors in judgment can be disclosing material facts, authorizing misleading reports, not taking corrective measures to solve issues, etc. The D&O insurance indemnifies suits filed on such grounds.

Negligence 

Negligence is when someone is careless in their duties. It includes D&Os’ behaviors such as a failure to supervise, careless inspection of company’s books, frequent absences from meetings, etc. A company’s shareholders or other stakeholders can sue for negligent behavior.

For instance, imagine a public company fails to file annual reports. In such cases, the shareholders can sue the company for negligence. However, D&O insurance can be the financial fallback for the company and cover its liability costs.

Improper management 

Investors may sue D&Os for improperly managing the company. Such improper management can be in the form of:

  • Unwarranted credit extensions,
  • Losses due to inefficient administration,
  • Sales of assets at unreasonably low prices.

If a company sells an asset worth $1,500,000 for $500,000, then it may have to face a lawsuit for financial mismanagement. Furthermore, if it is identified that the sale was made to someone closely related to a director, it can be considered improper self-dealing. D&O insurance reimburses for such claims.

Lack of corporate governance 

Let’s say a company is accused of not complying with the laws of toxic material disposal. Following the allegation, the regulatory body starts investigating the company and estimates that it will take years to study the case and reach a conclusion. Meanwhile, high attorney fees are being charged to the expense account of the company to handle the company’s response. In such instances, D&O policy covers such investigation costs and the government’s fine if found guilty.

D&O insurance covers fines, penalties, defense costs, and settlement costs incurred by the company’s D&Os.

Workplace woes 

Employees of a company can find the workplace discriminatory based on gender, race, or age. Additionally, the workplace environment may not be favorable due to sexual harassment, wrongful dismissal, etc. Typically, employment practices liability insurance covers such workplace discrimination. However, D&O insurance comes to play if a director or officer is alleged for such wrongdoings. The insurance covers the litigation costs.

Other coverages by D&O insurance include theft of intellectual property, poaching competitor’s employees or customers, breach of fiduciary duty, etc. Either talk to your insurance agent or comment on your questions below to better understand the coverages.

D&O Insurance Customization 

You can add, remove, or modify coverages in your D&O policy through endorsements. Talk to your insurance agent and add endorsements to your policy for better coverages. The common endorsements are:

Additional Side A Coverage 

Companies often pay for additional side A coverage to better insure their D&Os. A standard policy’s coverage may be inadequate to cover the risks. Remember, the endorsement will only be in use in case of outstanding claims after the exhaustion of the first layer of the policy.

Bump-up claims endorsement 

The Board of Directors and shareholders may disagree on the company’s sale price during acquisition. The dissatisfaction may lead shareholders to file a case demanding the disagreed upon value. Such value is called bump-up. D&O policy typically excludes such suits, but you can add this endorsement to cover such costs.

Extended reporting period (ERP) endorsement 

Typically, this endorsement helps the retired D&Os. Sometimes the decisions made by D&Os can take years to materialize and they may already be retired at the time of claim. Generally, D&O only covers for claims arising during the policy period. Also known as tail coverage, this endorsement typically extends coverage till 30-60 days of expiration. Therefore, you can stretch the extension period to several years.

In-house counsel endorsement 

Your in-house counsel or employed lawyer may be dragged into a D&O lawsuit. Generally, a D&O policy does not cover in-house counsel, exposing them to the risk of financial distress. However, this endorsement extends coverage to the in-house counsel.

Advancement of defense endorsement 

If you add this provision, your insurer will pay for the defense and indemnity costs immediately. Without this endorsement, your D&Os may be paying for the costs out of pocket. Although the insurer will reimburse you after the case is closed, the costs can be quite considerable so this endorsement can be very helpful.
Besides these endorsements, there are many other endorsements that you may want to explore, such as roadshow coverage, liberalization clause, or extradition endorsement.

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What Are the Exclusions?

While D&O covers claims that arise from a myriad of actions by D&Os, it has a few exclusions.

Fraud 

There are industry-specific laws, regulations, and statutes. D&Os should comply with such legal standards. Any dishonesty or fraudulent act may lead to voiding the insurance contract and thus, financial distress.

Personal gain 

Insurance carriers want to prevent the insureds from making profit from their insurance policies. Hence, it is a no-brainer that insurance may not cover instances where D&Os are guilty of underserved personal gains.

Insured vs. Insured exclusion 

Insurers do not cover lawsuits among D&Os of the same company. The motive is to avoid fallouts or collusion due to corporate infighting. As such, the concerned D&Os pay for the legal fees and settlement costs. However, insurers can lift the exclusion under some instances, such as when a whistleblower files suit under the False Claims Act, or when former D&Os make claims, etc.

Antitrust exclusion 

D&O insurance excludes any loss due to activities carried out by companies to impede competition. For instance, deceptive and unfair trade practices. However, you can negotiate or completely lift off this exclusion by talking to your insurance provider.

Prior knowledge claims 

Before purchasing the policy, if you have a reasonable basis to believe that a particular activity will potentially lead to a lawsuit against your company in the future, such activity-induced losses are excluded. Hence, if you are aware of such situations, you should provide details to the insurer. If it is found that you had been dishonest while applying for insurance, the insurer may cancel coverage.

Derivative shareholder action 

Each board member should be dutiful in ensuring their actions are in the company’s best interest. Breach of this fiduciary responsibility and inaction by corporate management to correct such a situation can instigate lawsuits against D&Os by shareholders. This phenomenon is known as shareholder derivative action. However, insurers typically exclude such suits based on the insured vs. insured exclusion.
Since this policy covers D&Os from risks inherent in their roles, insurers exclude risks best covered by other insurance policies. Such risks are cyber risk, professional risk, risk of property damages and bodily injuries, etc.

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Factors Affecting Cost of Insurance  

Many factors affect the premium of a D&O policy:

Ownership model 

The ownership model—private, public, or non-profit—affects the cost of insurance. For instance, public corporations, because of inherently higher risks, are charged a higher premium.

Type of business and years of experience 

Companies that carry out exclusively single product lines have lower risks when compared to conglomerates. Hence, the former will have a lesser premium than the latter. Additionally, there is a reverse relationship between insurance premium and the D&Os’ years of experience.

Insured vs. Insured exclusion 

Insurers do not cover lawsuits among D&Os of the same company. The motive is to avoid fallouts or collusion due to corporate infighting. As such, the concerned D&Os pay for the legal fees and settlement costs. However, insurers can lift the exclusion under some instances, such as when a whistleblower files suit under the False Claims Act, or when former D&Os make claims, etc.

International exposures

Multinational companies incur higher insurance costs because the severity of lawsuits is higher than a company operating within domestic territories. Furthermore, cross-border litigations may involve multiple claimants, resulting in higher probabilities of litigations.

History of claims 

If a business has records of frequent D&O litigations, the cost of insurance will soar. To clarify, a higher number of claims reflect high risk, leading to higher insurance premiums.

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Which Insurances Include This Insurance Policy?

You may find D&O insurance coverages in various other industry-specific packages such as:

Get in touch with our seasoned agents and get the best coverage. Find an agent today!

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