Directors and officers insurance, also called management liability insurance, covers legal expenses when board members are sued over decisions they made on behalf of the company.
If a board member is sued for misappropriating funds or making poor investments, directors and officers insurance helps pay for legal fees.
Example: A software development business 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.
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.
Example: Board members remove the female CEO of a management consulting company who has helped double the business’s revenue during her tenure. She sues the company’s board for gender discrimination and wrongful termination.
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.
Example: Several influential board members at a real estate brokerage suggest a print ad campaign featuring misleading market share statistics about a competitor and are later sued for libel.
If board members or executives violate one of the organization’s bylaws, they could be sued by shareholders, employees, or other board members.
Example: A board member at a large public mobile application development 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.
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.
Example: A data breach at a medical office exposes thousands of patients’ confidential information. It is later discovered that the organization was not in full compliance with the HIPAA security rule, and patients sue the board for negligence.
Directors and officers insurance is unlikely to cover financial losses or lawsuits resulting from premeditated criminal acts by board members or executives, including embezzlement and fraud.
If a board member at your nonprofit hurts his back when lifting boxes for a holiday food drive, D&O won’t cover his medical treatment or lost wages while he can’t work. 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.