Directors and Officers Liability Insurance Policy Information
Directors and Officers Liability Insurance. Directors and officers liability insurance provides a number of key protections to board members and directors that aren't provided by other personal or commercial insurance plans. Like all other forms of executive liability protection, these policies can be vital for avoiding the high costs of both frivolous and legitimate claims.
Following is everything you need to know about these plans, including what they will cover and what they will not. You'll also find helpful information concerning some of the lesser-known but incredibly important provisions that this coverage provides.
A directors and officers liability insurance policy can help you attract and maintain qualified executives and board members.
Directors and Officers Liability insurance protects your executives from lawsuits with rates as low as $87/mo. Get a fast quote and your certificate of insurance now.
Below are some answers to commonly asked D&O questions:
- How Much Does Directors and Officers Liability Insurance Cost?
- What Directors And Officers Liability Insurance?
- Do I Have Any D&O Coverage Under My Homeowners Insurance?
- What defined term must a loss qualify for in order to enjoy the coverage of a D&O policy?
- What is Side C Coverage?
- What protection is typically provided by directors and officers liability coverage?
- What two coverages are typically found under a directors and officers liability policy's insuring agreement?
- Who are the insureds under the directors and officers liability policy?
- Who is obligated to provide the defense under the directors and officers liability policy?
- What Are The Sources Of Directors And Officers Liability Claims?
- Why Should Private Companies Buy Directors & Officers Insurance?
- What Are Common Directors And Officers Liability Insurance Coverage Gaps?
How Much Does Directors and Officers Liability Insurance Cost?
The average price of a standard $1,000,000 Directors and Officers Liability Insurance policy for small businesses ranges from $87 to $119 per month based on location, financials, industry, payroll, sales and experience.
Directors And Officers Liability Insurance 101
Corporate directors and officers (D&O) have a duty to manage the company in their stockholders' best interests. They are bound to use due care and to be diligent in respect of the management and administration of the corporation's affairs and in the use of its property and assets. Accordingly, they are liable for losses or injuries that are caused by their breach or neglect of duty.
Recognizing the need to have competent directors and officers on executive boards, many corporations have put in their by-laws or charters certain resolutions undertaking to indemnify their directors and officers for legal expenses incurred by them in defending suits based on alleged wrongful acts in their capacities as directors and officers. Such indemnification provisions are permitted by most states' laws. Protection varies from state to state. In general, state statutes do not protect directors from claims brought by governmental agencies, or claims alleging violations of securities and exchange laws or other federal laws.
What Directors And Officers Liability Insurance?
This directors and officers liability insurance, often referred to as D&O insurance, this coverage protects officers and directors against legal claims that are made against them while serving as officers or on the board of directors. This type of coverage can be bound for professionals serving in this capacity for privately held firms, non-profit organizations and educational institutions. It is not unlike the malpractice insurance that lawyers, dentists and doctors maintain or the errors and omissions insurance that licensed professionals use as part of their comprehensive commercial insurance plans.
This is most true in the sense that D&O insurance will cover damages and legal expenses that are the result of managerial actions or decisions resulting in financial loss. Directors and officers are held legally and financially responsible for the decisions that they make on behalf of or affecting shareholders, client companies, creditors and investors. Claims of this nature are being seen in businesses with increasing frequency.
Unfortunately, those who serve as officers and directors can be held personally liable for the resulting damages if this coverage isn't in place. It is also important to note that both non-profit and for-profit companies will need to bind this directors and officers liability insurance to protect directors and officers if they hope to attract qualified board members and executives and retain the services of these individuals.
Do I Have Any D&O Coverage Under My Homeowners Insurance?
It is a common and costly myth that board members are covered by their home insurance policies. While their may exist certain protections for these individuals within their homeowners' insurance plan, these provisions are not guaranteed to cover all costs, nor are they guaranteed to be relevant all of the time.
In short, people should not count on these policies to cover them for any association board service, even if they happen to be compensated for filling these rolls. The protections that do exist under certain homeowners insurance plans are rarely going to prove sufficient for cover all legal expenses and other costs from the average liability case.
It's additionally important to note that corporate indemnification specifications are not guaranteed to protect all board members in all instances. Indemnification serves as a corporation's front-line or primary protection against liability claims. Despite being incredibly broad in its coverage terms, corporate indemnification should not be considered as being unlimited in the purest sense of the word. This protection often has limits on its abilities to indemnify individuals. Moreover, insolvency can and often does have an impact on a business' ability to honor obligations pertaining to indemnification
There are many prospective board members who will be unwilling to accept their appointed positions if they lack protections under a company's indemnification specifications. There are others still, who insist on having a more extensive measure of protection through supplementary directors and officers liability insurance or standalone D&O.
D&O Liability Insurance - Questions and Answers
What defined term must a loss qualify for in order to enjoy the coverage of a D&O policy?
It must meet the definition of a "Wrongful Act."
What is Side C Coverage?
It is Directors and Officers protection for companies when they are named in litigation along with their directors or officers.
What protection is typically provided by Directors and Officers Liability coverage?
Directors and Officers Liability (Side A Coverage) - pays on behalf of any directors or officers for their liability arising out of wrongful acts. Company Reimbursement or Company Indemnification (Side B Coverage) - reimburses the insured company for payment made to its directors and officers. The payments must involve the director or officer's expenses incurred by reason of claims made against them for wrongful acts, and to which they are entitled by the company's by-laws.
What two coverages are typically found under a directors and officers liability policy's insuring agreement?
Most Directors and Officers Liability policies issued are written under a single policy cover, but with two separate coverages: Directors and Officers Liability (Side A Coverage) and Company Reimbursement or Company Indemnification (Side B Coverage).
Who are the insureds under the Directors and Officers Liability policy?
There are two methods of describing the covered directors and officers under the Directors and Officers Liability policy. Some underwriters prefer to have the insured company list the titles or positions of directors and officers covered in the applicable declarations page. This permits the underwriters to review the positions insured. Several underwriters have revised their contracts to add an item on the declarations page which reads: "The policy does not provide coverage for the following positions." When such a provision is used, all directors and officers are covered except for any that are specifically excluded by the insured corporation.
Who is obligated to provide the defense under the D&O policy?
The Directors and Officers Liability policy does not contain an express duty to defend the insureds. There is no obligation by the insurer to pay costs of defense on an ongoing basis. The insureds must pay defense costs until the ultimate resolution of the claim to determine whether coverage exists and the insurer is obligated to pay. In practice, insurers typically cover ongoing defense costs, because some insureds could jeopardize the quality of defense if they couldn't afford adequate defense on their own.
What Are The Sources Of Directors And Officers Liability Claims?
As a result of a research company survey completed by a large sample of businesses, it was found that their Directors and Officers coverage-related losses originated from the following chief sources:
Direct and Derivative Shareholder/Investor Suits
- Mergers and acquisition
- Inadequate/inaccurate disclosure
- Takeover threats or bids
- Challenge to takeover defense measure
- Divestiture or spin-off
- Financial performance/bankruptcy
- Wrongful termination
- Breach of employment contract (not termination)
- Pension, welfare or other employee benefit disputes
Government and Regulatory Agencies
- Violations of: Civil Rights, Wall Street Reform and Consumer Protection Act(Dodd-Frank) Violations and Sarbanes-Oxley Act
Why Should Private Companies Buy Directors & Officers Insurance?
Following are 10 good reasons for private companies to purchase directors & officers liability coverage (in no particular order):
- Employee claims: EPL claims made against private companies are frequent and severe.
- Shareholder claims: Claims by minority shareholders are a significant threat. Such shareholders are often employees with day-to-day knowledge of the company's activities and are better able to uncover director/officer malfeasance than would the typical shareholder of a large, publicly traded corporation whose only connection to the business is owning shares of stock in the organization. Thus, because they have better information, the shareholders of small, privately held companies are more likely to make claim allegations "stick."
- Claims by miscellaneous entities: Claims by non-shareholders, including competitors, government agencies and regulators, creditors, customers, and vendors, are commonly made against private companies.
- Fiduciary claims: Private companies that offer benefit plans to their employees are subject to the ERISA of 1974 and thus have an exposure to claims alleging breach of the responsibilities mandated by this law.
- Director/officer asset protection: Yet another reason for private companies to buy D&O insurance is that such coverage serves to protect the personal assets of officers and directors in the event they are sued in conjunction with their service. While corporate bylaws and state laws typically require companies to indemnify directors, indemnification is not always provided. For example, if the company is insolvent, it may be financially unable to make such an indemnification. Also, no indemnification is provided when derivative suits are filed.
- Company protection and survival: Most small businesses do not have the financial wherewithal to fund major litigation and/or cover large settlements and judgments out of their operating capital. Having D&O coverage in place may be the difference between liquidation and survival for many privately held organizations.
- Ability to recruit managerial/board talent: A company that does not purchase D&O coverage may have difficulty recruiting directors. Directors fear lawsuits and expect the firm to protect them against potential litigation.
- When/if the company goes public: Once a firm becomes a public company, the threat of lawsuits rises substantially, especially the threat of securities class action claims. As a result, virtually all public companies buy D&O insurance. If a firm purchased D&O insurance coverage while it was privately held, the terms and conditions of its public company D&O policy form-as well as its premium-will be more favorable, compared to one that is buying such a policy for the first time. This is because the company's history as a D&O buyer while still privately held establishes a "track record" with an underwriter. Moreover, such a company will have less difficulty buying prior acts coverage (i.e., coverage applying to wrongful acts before the company went public) compared with one seeking D&O insurance for the first time.
- Access to credit: Having D&O coverage will make it easier for the firm to obtain credit. If the company defaults on a loan or, worse, declares bankruptcy, banks and creditors will want a source of funds available to recoup their losses from the loan default. And even if such a default or bankruptcy never happens, merely providing evidence of D&O coverage indicates to a loan officer that the private company is soundly managed.
- Enhanced coverage breadth: Compared to D&O policies written to cover publicly held companies, private company D&O policies offer demonstrably broader coverage but at a much lower premium. Private companies should take advantage of this opportunity, as it will not be available once the firm goes public.
What Are Common Directors And Officers Liability Insurance Coverage Gaps?
Privately Held Companies Not Buying D&O Insurance
When a private company has not purchased a D&O policy and is sued, it often lacks a source of reimbursement for defense and settlement costs. It also has no ready access to the expertise and experience an insurer can provide to assist it in defending the claim.
Private companies are not required to report or publish their financial statements. Nevertheless, they have significant exposures to claims, including securities claims.
Also, privately held companies are frequently sued by competitors, government agencies, regulators, and employees-in addition to stockholders-based on allegations that involve areas other than the organization's securities.
Not Naming High Level Non-officers As Insureds
In some organizations, such as hospitals, individuals in officer positions do not have titles like "vice president" or "secretary." A person who is, in effect, the chief executive officer of a hospital may have the title "chief administrator."
Under such circumstances, to avoid an unintended gap in coverage, it may be worthwhile to specifically list, in the policy declarations, the person or persons for whom coverage is intended to apply.
No D&O Coverage For Executives Serving On Outside Boards
It is not unusual for a corporation's directors and officers to also serve on the boards of other organizations. Such outside service generates exposures to liability.
A company's D&O policy can include coverage for the corporation's directors and officers who also serve on the board of an outside nonprofit organization.
Not Buying D&O Coverage For A Newly Acquired Subsidiary's Prior Acts
Merger and acquisition activity often gives rise to lawsuits by stockholders alleging that the directors and officers of the buyer and/or the acquired company somehow failed in performing the duties owed to their respective corporations.
Allegations in lawsuits filed against the directors and officers of the buyer generally fall into one of three categories:
- They pursued their own interests (either financially or in terms of personal ambition) over those of shareholders in making or attempting the acquisition.
- They paid too much for the acquisition.
- They did not properly evaluate the impact of the acquisition on the firm's financial performance.
Suits against directors and officers of the acquired company are of particular concern because the company's D&O liability insurance policy is automatically canceled on the effective date of the acquisition. The now-canceled policy will not cover acts committed prior to the acquisition (but for which claims are made after the acquisition date).
This presents a problem since mergers and acquisitions almost always increase the likelihood of a lawsuit against the acquired company's board of directors.
Failure To Remove Or Amend The Failure To Maintain Insurance Exclusion In A D&O Policy
Many D&O policies exclude coverage for claims alleging loss due to the failure of directors and officer to maintain insurance coverage. Because this exclusion can easily lead to denied claims, the exclusion should be removed if possible.
Tips For Optimizing Directors And Officers Insurance
On the part of corporations, it is important to maintain a commitment to protecting directors and officers from financial and legal harm that might result from service in good faith.
Not only is this critical for attracting the top talent or the most qualified people for these positions, but it can also play a major role in ensuring the maintenance of a good corporate reputation. When these protections are not provided by corporations or simply do not exist due to the nature of the individual's role, it is absolutely vital for directors and officers to take diligent steps to protect themselves.
'Real Life' Court Cases Involving D&O Liability Policies:
Golf Course Superintendents Assoc. Of America, Plaintiff V. Underwriters At Lloyd's, London
A directors and officers liability policy, issued by Underwriters at Lloyd's of London, provided for indemnification for an obligation to pay by reason of a "wrongful act," defined in the policy as "any negligent act, error, omission, misstatement or misleading statement. . . ."
The named insured filed an action to recover a substantial sum, under the policy, that was awarded to a former employee who had been discharged after he had sued the organization for alleged discrimination due to his national origin.
The insured contended that the definition of "wrongful act" was ambiguous and should be construed in its favor. The underwriters argued that claims based on intentional conduct are not covered.
The federal district court accepted that argument of the insurers. The insured had been found liable for intentionally retaliating against an employee (by discharging him) because he filed a lawsuit under federal law. The court stated that the illegal retaliation against the employee was an intentional act, not a "wrongful act" as defined in and covered by the policy.
The underwriters' motion for summary judgment was granted, the court declaring: "This case is ordered dismissed with plaintiff taking nothing."
(Golf Course Superintendents Assoc. Of America, Plaintiff V. Underwriters At Lloyd's, London, Defendant. Us District Court For The District Of Kansas. Case No. 88-4251-R. March 15, 1991. Cch 1991-92 Fire And Casualty Cases, Paragraph 3314.)
Jeff Tracy, Inc., etc. plaintiffs, v. U.S. Specialty Ins. Co., etc, Defendants
Jeff Tracy, Inc., (Tracy) a construction firm was made the object of a complaint by its employees. The employees won damages due to a the California Dept. of Industrial Relations levying assessments in light of their allegations that Tracy had failed under California law to pay prevailing wages for during a major construction project.
During the effective date of the violations, Tracy was insured under a Directors and Officers policy issued by U.S. Specialty Ins. Co. (USSIC). After the assessments for the pay violation were levied, Tracy filed requests that they be paid under its D&O policy and USSIC denied coverage.
After exchanging correspondence debating the matter of USSIC's declination, Tracy filed suit, requesting a motion for summary judgment. Tracy sought a court decision finding USSIC obligated to cover the assessments and to pay related settlement costs due to breach of contract. USSIC filed a countermotion, asking to be relieved of any obligation to respond to the loss.
USSIC reiterated its position that the loss involved an employment practice and was barred for coverage under its D&O policy by three, distinct exclusions. Tracy argued that USSIC breached its contract as it owed a duty to defend against the allegations made by its employees and that the assessments levied against it were eligible for coverage as, essentially, back payment of wages.
The court reviewed the D&O policy language, in particular its definitions of:
- Insured Organization
- Insured Person
- Employment Practices Wrongful Act
as well as several policy exclusions. The court found the policy's exclusion F (3) to be of particular relevance. Per a separate endorsement, Tracy and USSIC agreed that (USSIC): "will not be liable to make any payment of "Loss" in connection with any "Claim" for any "Employment Practices Wrongful Act."
The court did not review the policy's other exclusions. It ruled that USSIC's exclusion was applicable to the Tracy's loss and the insurer had no obligation to respond to the event. It therefore granted the insurer's motion for summary judgment and denied Tracy's motion.
(Jeff Tracy, Inc., etc. plaintiffs, v. U.S. Specialty Ins. Co., etc, Defendants. USDISCT, Central District of Cal., Southern Division. No. SA CV 08-361AHS. Filed May 5, 2009.)
Types Of Small Business Insurance - Requirements & Regulations
Perhaps you have the next great idea for a product or service that you know will appeal to your local area. If you've got a business, you've got risks. Unexpected events and lawsuits can wipe out a business quickly, wasting all the time and money you've invested.
Operating a business is challenging enough without having to worry about suffering a significant financial loss due to unforeseen and unplanned circumstances. Small business insurance can protect your company from some of the more common losses experienced by business owners, such as property damage, business interruption, theft, liability, and employee injury.
Purchasing the appropriate commercial insurance coverage can make the difference between going out of business after a loss or recovering with minimal business interruption and financial impairment to your company's operations.
Insurance is so important to proper business function that both federal governments and state governments require companies to carry certain types. Thus, being properly insured also helps you protect your company by protecting it from government fines and penalties.
Small Business Insurance Information
In the business world, there are many risks faced by company's every day. The best way that business owners can protect themselves from these perils is by carrying the right insurance coverage.
The The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight.
Commercial insurance is particularly important for small business owners, as they stand to lose a lot more. Should a situation arise - a lawsuit, property damage, theft, etc. - small business owners could end up facing serious financial turmoil.
According to the SBA, having the right insurance plan in place can help you avoid major pitfalls. Your business insurance should offer coverage for all of your assets. It should also include liability and casual coverage.
Types Of Small Business Insurance
Choosing the right type of coverage is absolutely vital. You've got plenty of options. Some you'll need. Some you won't. You should know what's available. Once you look over your options you'll need to conduct a thorough risk assessment. As you evaluate each type of insurance, ask yourself:
- What type of business am I running?
- What are common risks associated with this industry?
- Does this type of insurance cover a situation that could feasibly arise during the normal course of doing business?
- Does my state require me to carry this type of insurance?
- Does my lender or do any of my investors require me to carry this type of policy?
A licensed insurance agent or broker in your state can help you determine what kinds of coverages are prudent for your business types. If you find one licensed to sell multiple policies from multiple companies (independent agents) that person can often help you get the best insurance rates, too. Following is some information on some of the most common small business insurance policies:
|Business Insurance Policy Type||What Is Covered?|
|General Liability Insurance||What is covered under commercial general liability insurance? It steps in to pay claims when you lose a lawsuit with an injured customer, employee, or vendor. The injury could be physical, or it could be a financial loss based on advertising practices.|
|Workers Compensation Insurance||What is covered under workers compensation insurance? This type of insurance protects a business and its owner(s) from claims by employees who suffer a work-related injury, illness or disease. Workers comp typically provides the injured employee with benefits to cover medical expenses, a portion of his/her lost wages, rehabilitation costs if applicable, and permanent partial or permanent total disability.|
|Product Liability Insurance||What is covered under product liability insurance? I pays an injured party's settlement or lawsuit claim arising from a defective product. These are usually caused by design defects, manufacturing defects, or a failure to provide adequate warning or instructions as to how to safely use the product.|
|Commercial Property Insurance||What is covered under business property insurance? General liability policies don't cover damages to your business property. That's what commercial property insurance is for. It protects all of the physical parts of your business: your building, your inventory, and your equipment, giving you the funds you need to replace them in the event of a disaster. If you work from home, you might consider a Home Based Business Insurance policy instead.|
|Business Owners Policy (BOP)||What is covered under a business owners policy (BOP)? This is a policy designed for small, low-risk businesses. It simplifies the basic insurance purchase process by combining general liability policies with business income and commercial property insurance.|
|Commercial Auto Insurance||What is covered under business auto insurance? This type of insurance covers automobiles being used for business purposes. This could include a fleet of business-only vehicles or a single company car. In some cases it might cover your car or your employee's car while they're being used for business. These policies have much higher limits, ensuring you can cover your costs if one of these vehicles gets into an accident.|
|Commercial Umbrella Policies||What is covered under commercial umbrella insurance? This type of policy is a sort of "gap" insurance. It covers your liability in the event that a court verdict or settlement exceeds your general liability policy limits.|
|Liquor Liability Insurance||What is covered under liquor liability insurance? It covers bodily injury or property damage caused by an intoxicated person who was served liquor by the policy holder.|
|Professional Liability (Errors & Omissions)||What is covered under professional liability insurance? This type of business insurance is also known as malpractice oe E&O. It covers the damages that can arise from major mistakes, especially in high-stakes professions where mistakes can be devastating.|
|Surety Bond||What is covered under surety bonds? Bonding is a contract where one party, the SURETY (who assures the obligee that the principal can perform the task), guarantees the performance of certain obligations of a second party, the PRINCIPAL (the contractor or business who will perform the contractual obligation), to a third party, the OBLIGEE (the project owner who is the recipient of an obligation).|
Who Needs General Liability Insurance? - Virtually every business. A single lawsuit or settlement could bankrupt your business five times over. You might also need this policy to win business. Many companies and government agencies won't do business with your company until you can produce proof that you've obtained one of these policies.
Business Insurance Required by Law
If you have any employees most states will require you to carry worker's compensation and unemployment insurance. Some states require you to insure yourself even if you are the only employee working in the business.
Your insurance agent can help you check applicable state laws so you can bring your business into compliance.
Other Types Of Small Business Insurance
There are dozens of other, more specialized forms of small business insurance capable of covering specific problems and risks. These forms of insurance include:
- Business Interruption Insurance
- Commercial Flood Insurance
- Contractor's Insurance
- Cyber Liability
- Data Breach
- Directors and Officers
- Employment Practices Liability
- Environmental or Pollution Liability
- Management Liability
- Sexual Misconduct Liability
Whether you need any or all of these policies will depend on the results of your risk assessment. For example, you probably don't need an environmental or pollution policy if you're running an IT company out of a leased office, but you would need data breach and cyber liability policies to fully protect your business.
Also learn about small business insurance requirements for general liability, business property, commercial auto & workers compensation including small business commercial insurance costs. Call us (855) 767-7828.
Additional Resources For Small Business Insurance
Protect your company and employees with the right commercial insurance policies. Read informative articles on small business insurance coverages - and how they can help shield your company from legal liabilities.
- Small Business
- Business General Liability
- Business Interruption
- Business Liability
- Business Owners Policy (BOP)
- Certificate of Insurance
- Commercial Auto
- Commercial Crime
- Commercial Package Policy
- Commercial Umbrella
- Comprehensive General Liability
- Directors and Officers Liability
- Cyber Liability
- Employers Liability
- Employment Practices Liability
- Event Cancellation
- Fiduciary Liability
- General Liability
- Home Based Business
- Independent Contractor
- Liability Insurance Certificate
- Liability Insurance
- Ocean Marine
- Professional Liability
- Workers Compensation Insurance
Your small business faces many potential disasters including: fire, floods, theft, equipment breakdown, lawsuits from clients or customers and current & former employees. Any many other risks you haven't even thought about.
A small business commercial insurance program should provide protection for both larger and smaller disasters. The obvious things like fire, flood and theft most business owners think about... but what if a hacker infects your computers with a virus - and files containing private customer information like credit card and Social Security numbers are stolen?
Who is going to pay to fix your customers credit rating etc...? Will your insurance pay for the cost? You need to know that.
Your commercial insurance program should cover events that can close down your company, or cause it to lose revenue. Anything less than that is not enough coverage. Commmercial insurance doesn't cover everything, and all policies have exclusions and limits.
You need a written plan that allows you to get your operations back up and running as quick as possible.