D&O insurance helps companies of all sizes attract and retain top executive talent.
Directors and officers liability insurance (D&O) covers corporate directors and officers from liability for negligent acts, omissions and misleading statements that harm employees or shareholders.Directors have serious responsibilities. When acting in their official capacity, they owe the corporation:
- A duty of care. They must make informed decisions, perform in good faith, and act in the best interest of the company.
- A duty of loyalty. They must not act to further personal interests and refrain from personal action damaging to the corporation.
- A duty of obedience. They must perform their duties within the corporate charter/bylaws and act in accordance with all laws, statutes and regulations pertaining to their industry.
Breaching any of these obligations can lead to personal liability for the individual director or officer involved, as well as an allocation of blame to the other directors and officers on the board.
Why Buy D&O Coverage
- To avoid paying for claims against directors and officers. Most corporate bylaws require the organization to “indemnify” its directors if they are named in a lawsuit or claims as a result from acting in their official capacity. This means the corporation must pay for the director’s legal representation, plus any settlements or judgments. Judgments and settlements in D&O claims can cost millions.
- To recruit the best directors and officers. Even if your bylaws require indemnification of directors and officers, these individuals want to know the funds will actually be available when needed. D&O insurance guarantees they will.
- To protect the organization from certain employment practices lawsuits. Employment practices claims (claims by employees and job applicants) topped the causes of D&O claims for private and nonprofit corporations in a 2012 survey by Towers Watson. For public companies, derivative and direct shareholder suits led the causes of claims.
- To protect investors. They want to know that they have adequate financial backing in case gross mismanagement makes their investment in a company go sour.
How Much Does It Cost?
No standard D&O policies exist. Underwriters will tailor coverage to your company’s needs and determine your rates based on the exposure your company presents. A company with unsound management practices creates higher risk exposures for the insurer; likewise companies in unstable industries. The more information you can provide to demonstrate your company’s good management practices, the better coverage terms you will be able to secure.
To apply for D&O coverage, you will likely have to present information on any past shareholder or employment practices claims, copies of corporate bylaws and minutes of board meetings, copies of employee handbooks, biographical information on your board members and more.