Wealth and high community profiles make executives more vulnerable to lawsuits than other individuals. Typical claims against directors and officers include employment-related liability, such as discrimination, harassment and wrongful termination; mismanagement of assets; and failure to provide services.
State law or your corporate bylaws might require corporations to “indemnify,” or reimburse, directors and officers for personal liability that arises from their official duties. You do not need to buy insurance for this risk, but buying a directors and officers liability (D&O) policy can ensure you have the funds needed to cover these often costly claims. And lack of adequate insurance coverage can discourage executives from wanting to serve on your board—whether it’s a for-profit or nonprofit entity.
As nonstandard policies, D&O policies can vary greatly from insurer to insurer. The typical D&O policy contains two parts:
- Part A covers directors and officers, reimbursing them directly for claims of liability that arise from their corporate duties.
- Part B covers the corporation, reimbursing it for expenses it pays on behalf of the directors and officers, if state law permits or corporate charter or bylaws require the corporation to indemnify directors and officers.
Some policies also contain Part C, or “entity coverage,” which covers the corporation itself when it is named in a lawsuit or claim. Insurers began adding entity coverage to their D&O policies in the 1990s, in response to a spate of securities and employment practices liability lawsuits that named the corporation as a defendant along with the directors and officers.