What Does Directors and Officers Insurance Cover?

Consider the immense responsibility that falls on the shoulders of your business’s executive team. While most of the decisions they make prove beneficial, some can end up harming employees, investors, vendors, or customers.

If these parties choose to sue, their claims could impact the personal assets of your directors or officers. Thankfully, getting directors and officers (D&O) insurance allows you to offer those making high-stakes decisions some much-needed protection.

What does directors and officers insurance cover? At Union Risk Services, we do more than just offer key personnel life insurance policies. We also create tailored D&O insurance policies that protect your leadership team’s personal assets.

Read on as we take a closer look at directors and officers liability insurance and how beneficial it can be for your business.

What Is Directors and Officers Insurance?

Businesses today operate in a highly complex legal environment that allows company executives to become targets of litigation. Directors and officers insurance provides wrongful acts coverage, protecting company executives from personal losses if they are sued as a result of their duties.

In doing so, this policy gives company leaders the confidence they need to make high-stakes decisions without any worry.

The Key Features of a Directors and Officers Insurance Policy

Let’s review some of the unique features that make a D&O insurance policy different from other forms of liability and business insurance.

Operates on a Claims-Made Basis

These policies are written on a claims-made basis, meaning that they must be in effect when the wrongful act happened and when the claim was made.

No Explicit Duty To Defend

In many liability policies, the insurer has a duty to defend the insured. Here, though, there is no obligation. Policyholders need to have a clear understanding of how they will manage and fund their defense in the event of a claim.

Contains Shrinking Limits

D&O insurance policies have a shrinking limit provision. This means that the costs of defending a claim, which can sometimes be substantial, can diminish the policy’s limits.

How Directors and Officers (D&O) Insurance Is Structured

What does directors and officers insurance cover? This will mainly depend on the structure of your insurance policy, which could fall under three different categories: A, B, and C.

Side A Coverage

This type of coverage protects the personal assets of a company’s directors and officers in situations where the company will not or cannot indemnify them.

Side B Coverage

Also referred to as company reimbursement, this coverage protects the company itself, reimbursing the defense costs the company incurred from a claim against its directors and officers.

When your company covers the legal costs, judgments, or settlements for your directors, this policy ensures you won’t bear all the costs on your own.

Side C Coverage

This coverage extends protection to a company in the event claims are made directly against it. It has become increasingly valuable today because more and more lawsuits name individuals and their company as codefendants.

Common Scenarios Where Directors and Officers Insurance Applies

Here are a few examples of the common scenarios where a D&O insurance policy will apply:

• Fiduciary duty claims: These are claims that arise from breaches of fiduciary duties owed, not only to the company, but also to its shareholders.
• Reporting errors: Claims of misleading or inaccurate financial or operational reports.
• Shareholder actions: A company’s shareholders could take legal action against directors who are failing to act in the best interest of the company.
• Creditor claims: Creditors can file claims against a company unable to meet its financial obligations.
• Corporate manslaughter: Someone could file claims related to a death that resulted from a company’s negligence or actions.

Common D&O Exclusions

As helpful as a directors and officers insurance policy might be, some situations fall outside its coverage. For instance, D&O insurance won’t help if the legal claim covers:

• Deliberate criminal acts by a company’s directors
• The receiving of illegal payments
• Intentional fraudulent acts

Who Needs Directors and Officers Insurance?

We know that “What does directors and officers insurance cover?” isn’t the only question you have. You are probably wondering what kind of business this coverage is for.

Since D&O insurance is an extremely versatile policy that caters to a wide range of businesses, it can be a bit tricky for some to determine if getting a policy is the right thing to do. However, no business is too small to be concerned about executive risks.

Here are a few examples of businesses that can benefit from getting a directors and officers insurance policy.

For-Profit Organizations

Such businesses face exposure to a huge amount of risks, with the decisions their executive teams make potentially resulting in regulator, competitor, creditor, and shareholder lawsuits. Without proper protection, company leaders might be hesitant to make high-stakes decisions.

Not-for-Profit Organizations

While the leaders of not-for-profit organizations might not face the same amount of risk, there is still a potential for lawsuits. Offering them the protection of a D&O insurance policy will go a long way in minimizing personal financial risks.

Small, Private Businesses

Many executives at small, private businesses often don’t think that D&O coverage is needed. However, even the executives of small, family-owned businesses can be held personally liable for business-related decisions or actions.

For instance, employment practices claims and poor financial performance can create situations where officers and directors face legal liability.

Provide Your Business’s Executive Team With the Protection They Need

No matter the size of your business, your executive team will always be at risk of facing lawsuits that hold them personally liable for their decisions and actions. Thankfully, with directors and officers insurance, you can protect not only your company directors, but your company as well.

What does directors and officers insurance cover? Here at Union Risk Services, we understand what insurance a business needs and can tailor policies that address the specific challenges you and your directors face.

Talk to us today at 718-370-3131 and let us help you provide your company leaders with peace of mind.