What Is Directors & Officers Insurance?
A common question among business owners of all sizes is: What is directors & officers insurance coverage and what does it cover?
Directors & Officers Insurance (D&O) Definition: Directors and Officers Liability Insurance is a type of liability insurance covering company directors and officers for claims made against them while serving on a board of directors and/or as an officer.
Directors and Officers Liability Insurance can be written to cover the directors and officers of public companies, privately held firms, non profit organizations, and educational institutions. In effect, the policies function as “management errors and omissions liability insurance,” covering claims resulting from managerial decisions that have adverse financial consequences.
Why Companies Need It?
At ALIGNED, we speak with several clients and potential clients every day and when it comes to Directors and Officers (D&O) Insurance Program, one of the most common misconceptions is that a Commercial General Liability (CGL) policy covers actions by a company’s board members and officers.
While similar in that CGL policies and D&O policies are both designed to safeguard companies from the ordeal of paying the massive expenses attached to lawsuits, they differ in who is covered and what actions are protected.
Commercial General Liability Insurance will generally cover a company for:
- Legal claims of bodily injury due to a business’s products or services
- Legal claims of bodily injury while on a business’s property
- Legal claims of property damage due to a business’s products, services or business operations
- Legal claims of false advertising
A Directors and Officers Liability Insurance policy can cover the directors and officers of public, private and non profit companies who are personally liable for their actions. It protects their personal assets in the event they are sued by vendors, customers, and other third-parties for claims of a “wrongful act” that caused stakeholder losses.
A wrongful act can include:
- Errors or omissions that led to financial losses
- Failure of an officer or director to comply with legal statutes or regulations – this does not include intentional criminal acts
- Failure to comply with the company’s by-laws or regulations
- Breach of duty by a director or officer
- Failure to act as a fiduciary
- Misleading statements by a director or officer
These directors and officers are not only personally liable, that liability exists regardless of ignorance of the by-law, regulation or statute or resignation by the director or officer.
The need for D&O Insurance is clear. To attract and retain top management talent, companies who show their commitment to protecting past, present and future directors and officers are at a marked advantage over those that do not.
Directors and officers are not only under pressure by their employers to meet and exceed expectations in all areas of governance to be considered successful at their posts, but they are also under scrutiny from:
- Governmental bodies
- Regular company employees
- Special-interest groups
- the general public
Not only could any member of one these groups file suit claiming a wrongful act, they could also be the cause of an investigation which itself carries with it the potential for personal expense and loss of reputation.
What Does Directors & Officers Insurance Cover?
It’s important to note that a D&O Insurance policy is not intended as blanket coverage for directors or officers to act recklessly or irresponsibly, but as a protection for the leaders of organizations sincerely doing their best for the company and public at large.
D&O Liability Insurance can provide these basic coverages:
- Lawyer’s fees and legal defence costs for lawsuits brought specifically against directors or officers alleging a wrongful act
- Settlements reached to avoid going to trial in a lawsuit based on the above
- Awards made by the courts after a trial involving wrongful acts by directors or officers
- Costs associated with an investigation into a director or officer’s alleged wrongful act
- Mistakes or misrepresentations made by previous, present and future directors and officers
- Financial losses sustained by shareholders due to a wrongful act
Directors and Officers Liability Insurance Coverage Considerations
Directors and Officers Liability Insurance (D&O) policies can contain “shrinking limits” provisions, meaning that defense costs—which are often a substantial part of a claim—reduce the policy’s limits. This approach contrasts with commercial general liability (CGL) insurance, in which defense are typically covered in addition to policy limits. However, some D&O insurance products do provide defence costs in addition to the limit on an unlimited basis or could provide a special sublimit that is “in addition to the policy limit” that is specifically for defence costs.
Other Distinctive Features of Directors and Officers Liability Insurance Policies:
- They are written on a claims-made basis
- Typically provides coverage for all past, present & future directors and officers of the organization.
- Cover monetary damages but exclude bodily injury (BI) and property damage (PD)
What Are Examples of Canadian Directors and Officers Liability Insurance Claims?
Real Canadian Directors and Officers Insurance Company Claim:
- An employee of a small, Canadian private business convinced the board of directors that he was qualified to step into the role of president of the company and he was appointed. Under his leadership the company’s financial position substantially weakened. On behalf of the company, a shareholder sued the board of directors alleging that it used poor judgment and did not act in the best interest of the company when it appointed the new President. The case eventually settled for $1,500,000 million plus legal fees of $300,000 resulted in a $1,800,000 loss paid by the insurance company.
See also Claims-made coverage trigger; Duty to defend; Errors and omissions (E&O) insurance; Non profit directors and officers liability insurance; Shrinking limits defense provision.
Whether your organization is a publicly traded company or a small private company D&O insurance should be considered to help protect the management/leadership team. To learn more about Directors and Officers Liability Insurance speak to an ALIGNED Insurance Advocate or connect with us at www.alignedinsurance.com