D&O Insurance

Directors & Officers Insurance

Published by Tom McNamara

During a recent risk analysis, a $15 million-dollar (revenue) company was asked for their Directors & Officers policy – to which they responded that they did not think their company was big enough for that coverage, a common confusion.

Some small business executives believe D&O is reserved for publicly traded or large companies. This is one of the many misconceptions about directors and officer’s liability insurance. While smaller companies do not have the exposure of a publicly traded company and may not have shareholders, directors and officers can still be personally sued.

Another common misconception is that company executives believe the general liability policy will cover claims. However, the general liability policy will not respond to management liability lawsuits allegations of mismanagement. 

D&O insurance protects directors and officers if they are personally sued in addition to the company being sued. The insurance can cover legal fees, settlements, and other costs.

D&O Insurance Definition: D&O is a type of liability insurance covering directors and officers for claims made against them while serving on a board of directors and/or as an officer. D&O liability insurance can be written to cover the directors and officers of for-profit businesses, privately held firms, not-for-profit organizations, and educational institutions. In effect, the policies function as “management errors and omissions liability insurance,” covering claims resulting from managerial decisions that have adverse financial consequences.

Directors and officers can be sued for various reasons connected with their company positions; for instance, the misuse of funds, fraud, lack of corporate governance, some employees have sued because they felt unfairly treated. The birth of COVID-19 has left yet another reason for employees to sue.

Cyber liability continues to be top of mind for many executives. Recently, a company faced a D&O suit from an unauthorized disclosure of identifiable non-public information of its customers, otherwise known as a Cyber Liability claim. The Directors & Officers policy responded and covered the nearly $200,000 in defense costs. This demonstrates how small companies are seeing $200,000 to $225,000 on average in defense costs per incident. 

To clarify, D&O Insurance is not a standard policy or off-the-shelf. No two policies are alike, and there is substantially more to know about this policy and how it protects you and your company. This can be said about all policies. 

Are your directors and officers adequately protected? The first step to determine whether coverage is adequate is a coverage analysis and understanding what degree of protection is in place. Determine if there are any gaps in coverage created by the exclusions in your policy. Most importantly, find a reliable broker who will be your partner in protecting your business, evaluate your risk profile and identify solutions to address those risks.

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