Directors and officers insurance protects board members and officers against legal expenses if they are sued for a decision they made on behalf of the company that led to a financial loss.
Any company or nonprofit organization that has a board of directors should consider directors and officers insurance (D&O), a type of management liability insurance. D&O protects board members from lawsuits over decisions they make while serving on your board. If they're sued, they could have to pay thousands of dollars in legal defense costs.
Securing this insurance policy protects your board members and the officers they elect or appoint. It helps your small business attract and retain top talent since they know their personal assets will be protected. Most board members will expect your business to carry this policy.
Your directors and officers take on responsibilities and risks on behalf of your company. If someone sues them for a decision they made that caused a financial loss or other grievance, your D&O insurance can protect them.
You might see these issues referred to as a breach of fiduciary duty, which means the person has failed to act in the best interest of your company.
Specifically, your D&O insurance policy provides coverage for:
If a board member is sued for mismanaging funds or making poor investments, directors and officers insurance can help pay for legal fees.
Workers can sue board members for a variety of reasons, including discrimination, wrongful termination, invasion of privacy, and even emotional distress if they're not satisfied with leadership. D&O insurance helps board members with lawsuit costs and protects their personal finances.
A competitor may accuse a company's board members of defamation or stealing intellectual property, which could result in a lawsuit covered by D&O insurance.
If board members or executives violate one of the organization’s bylaws, they could be sued by shareholders, employees, or other board members.
A company's board of directors can be held liable if the organization fails to comply with industry standards or regulations. D&O insurance offers protection against such lawsuits.
D&O insurance is beneficial for any business that has a board of directors. It protects your board members and officers against legal costs, and also helps attract top talent to your board who may look for this coverage before accepting a position.
The following industries often rely on this coverage as part of their risk management strategy:
Every nonprofit corporation must have a board of directors, and D&O insurance protects them in the event of a lawsuit related to their decisions.
For example, board members remove the female CEO of a charitable organization who has helped double the business’s revenue during her tenure. She sues the company’s board for gender discrimination and wrongful termination.
This policy could cover the board's legal costs and any resulting judgment or settlement.
Tech companies with a board of directors should consider D&O insurance to protect their members and officers, and to attract individuals with expertise. It can cover costs related to violations of bylaws, among other risks.
For example, a board member at a large public mobile app business violates the non-compete clause in the company’s bylaws by acting as a consultant to a competitor. The board member’s advice enables the competitor to launch a new iPhone app and triple its market share, causing the public company’s stock price to drop significantly.
Shareholders lose millions of dollars and file a lawsuit against the company’s board, which is covered by D&O insurance.
Directors and officers liability insurance provides important protection for consulting businesses, who may rely on their boards to make important decisions about acquisitions and other major moves.
For example, a marketing consulting firm acquires a smaller competitor and eventually loses millions of dollars because of the deal. It is later revealed that the board members who approved the transaction did not request important financial information on the acquired company, an oversight that results in a lawsuit.
The added liability of HIPAA makes D&O insurance a must-have for healthcare facilities whose board of directors helps make important business decisions.
For example, a data breach at a medical office exposes thousands of patients’ confidential information. It's later discovered that the organization was not in full compliance with the HIPAA security rule, and patients sue the board for negligence.
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While directors and officers insurance covers many different types of legal issues, its protection does not extend beyond decisions made by your directors and officers. To protect against bodily injuries, property damage, and other losses, you'll want to invest in other types of coverage.
Examples of exclusions from D&O coverage include:
Directors and officers insurance is unlikely to cover financial losses or lawsuits resulting from premeditated criminal acts by board members or executives. Fidelity bonds (a type of commercial crime coverage) can provide reimbursement for embezzlement and fraud committed against a client or your business.
If a board member at your nonprofit hurts their back when lifting boxes for a holiday food drive, D&O won’t cover their medical treatment or lost wages while they recover. Workers’ compensation insurance protects your organization from on-the-job injuries and related lawsuits, and most states require it for businesses with employees.
If a client trips at your business and breaks a wrist, or an employee drops a client's laptop, general liability insurance will help cover the resulting costs. Many landlords require this policy for businesses that rent a commercial space.
Directors and officers insurance does not protect your business against lawsuits over professional mistakes and oversights beyond those made by board members. Professional liability insurance, also called errors and omissions insurance, helps pay expenses related to missed deadlines, breach of contract, and other mistakes made by your business.
Your board members and officers face many of the same risks as your business: lawsuits over hiring and firing decisions, trademark issues, and mismanagement of funds. Unlike your business, they are not protected by general liability or professional liability policies.
If they're sued, D&O insurance can help pay the cost of hiring an attorney, judgments, settlements, and other expenses related to the lawsuit.
Small business owners often choose to bundle D&O liability coverage with employment practices liability insurance (EPLI), another type of management liability insurance.
EPLI can cover your legal costs if an employee sues your business over unfair hiring practices or another violation of employee rights. A management liability insurance bundle usually costs less than purchasing the policies separately.
D&O insurance is a type of management liability insurance and can often be bundled with similar coverages. These policies protect the decision-makers at your business and can help attract top talent to your company, as they may look for this protection in place.
Keep in mind that D&O only covers risks related to decisions made by your board members and officers. You'll want to consider other types of management liability insurance to protect your managers and other employees at your business.
A D&O insurance policy consists of three main agreements between the policyholder and the insurer:
Side A: Side A coverage protects individual directors and officers who would otherwise have personal liability in the event of a lawsuit. It pays them back for their out-of-pocket expenses.
Side B: When a business indemnifies its directors and officers, the business agrees to pay their legal costs and receive reimbursement from the insurer.
Side C: This coverage is also called entity coverage. It covers securities claims only for publicly traded companies, with broader coverage for private companies and not-for-profit companies.
Check with an agent to make sure you get the right coverage for your business.