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?
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
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.)
Small Business Economic Data & Insurance Regulations
Perhaps you have the next great idea for a product or service that you know will appeal to your local area. Maybe you want to contribute to the economic growth of your community. Whatever the reason is, if you're thinking about starting a small business, it's important to understand pertinent information relating to small businesses in the United States; namely economic information and insurance regulations. After all, if you want your small business to succeed, you have to understand the economic trends organizations of a similar size in your area.
Likewise, you want to ensure that your small business is well protected with the right business insurance and that you are in compliance with the rules and regulations that pertain to commercial insurance in your region.
Read up on economic statistics and insurance information that relates to small business owners in the United States.
Small Business Economic Data In The United States
Here's a look at some information that was compiled by the Small Business Association (SBA) regarding the economic data that pertains to small businesses in the United States:
- In 2015, small businesses in the United States employed an estimated 58.9 million American workers, or 47.5 percent of the nation's private workforce.
- Largest shares = fewer than 100 employees. The small businesses that employed 100 people or less had the largest share of employment amount small businesses.
- Employment increased by nearly 2 percent. In 2018, employment amongst small businesses increased by 1.8 percent, which is an increase of 1 percent from the prior year.
- Increase in proprietors. In 2016, the number of small business proprietors increased by 2.3 percent.
- In 2015, small businesses were responsible for creating 1.9 million net jobs. Organizations that employed 20 people or less had the largest gains, as they added an estimated 1.1 million net jobs.
- There were 5.7 million loans that were value less than $100,000 issued by lenders in the United States in 2016. These loans were issued under the Community Reinvestment Act.
- Small business owners that were self-employed at the incorporated businesses that they owned reported a median income of $50,347 in 2016.
- Small business owners that were self-employed at the unincorporated businesses that they owned reported a median income of $23,060 in 2016.
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. The SBA recommends the following insurance plans for small business owners:
- Commercial Property Insurance: In the case of an unplanned disaster - fire, flood, vandalism, theft, etc. - this type of coverage will help you avoid paying for the damage out of your own pocket. Even if you rent the property, you should still carry commercial property insurance.
- Commercial Liability Insurance: In the event that a legal situation arises - a negligence lawsuit, for example - commercial liability coverage will provide financial protection. It will cover the cost of legal defense fees, court fees, and even moneys that may be awarded.
- Commercial Auto Insurance: If you operate a vehicle for any activities that are related to your business - transporting and/or delivering goods, or meeting with clients - commercial auto insurance is legally required for businesses of all sizes, including small businesses.
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 Liability
- Business Owners Policy (BOP)
- Certificate of Insurance
- Commercial Auto
- Commercial Umbrella
- Comprehensive General Liability
- Directors and Officers Liability
- Cyber Liability
- Employers Liability
- Employment Practices Liability
- General Liability
- Home Based Business
- Independent Contractor
- Liability Insurance Certificate
- Liability Insurance
- 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.