Directors and officers insurance
Directors and officers insurance
Directors and officers insurance (D&O) protects board members and officers if they are sued for a decision they made on behalf of your company.
Why do you need directors and officers insurance?
Directors and officers insurance (D&O) is a type of management liability insurance. This policy safeguards your board members, directors, and officers against lawsuits arising from their management decisions.
If your board commits a breach of fiduciary duty, this policy ensures they won’t experience financial loss when defending themselves in court.
Most general liability insurance and errors and omissions insurance policies exclude lawsuits filed by stockholders, employees, clients, or regulatory bodies against your business's board members, directors, or officers. As a result, candidates for your board will usually require D&O insurance before they become members.
Not only is D&O coverage key for your company's risk management, but potential investors may require proof of coverage as part of their conditions for investing in your business.
D&O insurance provides protection for:
- Unethical employment practices
- Mismanagement or misrepresentation of funds
- Failing to follow corporate bylaws
- Failing to comply with industry regulations
- Intellectual property infringement or libel
What does directors and officers insurance cover?
D&O liability insurance covers legal costs when your company's directors, board members, or officers are sued over decisions they made on behalf of your company.
This includes:
Employment practices
Lawsuits over employment practices account for the bulk of D&O insurance claims. This policy protects your board members and officers when an employee sues over discrimination, harassment, wrongful termination, invasion of privacy, or mental and emotional distress.
Mismanaged funds
If a financial decision negatively impacts shareholders, they could sue your board members or officers for mismanagement of funds. D&O insurance helps pay the cost of their legal defense, including the cost of reaching a settlement or paying a court-ordered judgment.
Failure to follow corporate bylaws
Corporate bylaws define the rules that board members and officers must follow as they make decisions for your business. If a board member or company executive violates these rules, shareholders, employees, or other board members could hold them accountable by filing a lawsuit against them.
Failure to comply with industry regulations
If your company fails to comply with industry regulations meant to ensure consumer safety and privacy, a regulatory body can hold your board of directors or officers accountable. D&O insurance helps the accused parties pay legal defense costs, including settlements, judgments, or fines, in the event of a lawsuit.
Intellectual property infringement or libel
If a board member or officer makes a decision that leads to intellectual property infringement or libel, they could face a costly lawsuit from the affected party. D&O insurance covers the cost of mounting a legal defense, including the cost of paying a settlement or judgment.
How much does directors and officers insurance cost?
Directors and officers policyholders pay on average $138 per month, or $1,653 a year, for coverage. Your exact premium may be more or less depending on your risks.
The cost of directors and officers insurance is based on several factors, including:
- Policy limits
- Deductible
- Legal jurisdictions based on location
- Industry risk factors
- Number of employees and directors
- Revenue
- Claims history
- Potential for initial public offering
Who needs D&O insurance coverage?
Directors and officers liability insurance benefits a variety of small businesses that have an active board of directors or management team.
You may consider a D&O insurance policy if:
Your company has employees
If an employee makes an allegation of harassment, discrimination, or wrongful termination against your director, your business can lean on D&O insurance to cover the director’s legal fees, including a settlement or judgment for the employee.
Your small business has stockholders
If your board makes a management decision that negatively affects your stockholders, they could be accused of misusing company funds. D&O insurance covers the cost of reaching a settlement with stakeholders or, if need be, taking the case to court for a judgment.
Your company has a compliance officer
If your compliance officer doesn’t adhere to industry regulations, a regulatory body could file a lawsuit against that officer. D&O insurance helps your business cover legal expenses, including court fees, attorneys' fees, fines, and other claim-related costs.
Your company is a venture-backed startup
Your small business is a nonprofit
Top professions that need D&O insurance
Don't see your profession? Don't worry. We insure most businesses.
What isn't covered by directors and officers insurance?
While directors and officers insurance provides vast coverage for your board of directors and officers, it also has some exclusions.
For instance, a D&O policy does not cover:
Criminal activity
If one of your board members or officers intentionally breaks the law or engages in criminal acts, D&O insurance won’t compensate your business for any costs related to the offense. This includes wage theft, embezzlement, fraud, insider trading, money laundering, or other crimes.
Only fidelity bonds (a type of commercial crime insurance) protect your business from illegal employee acts, such as forgery, theft, or fraud.
Decisions made by employees
D&O insurance only protects your board members and officers. This coverage does not extend to your employees.
If an employee at your small business makes a mistake that leads to a lawsuit, errors and omissions insurance (also known as professional liability insurance) would cover those costs.
Director injuries
If a director or another member of your management team suffers a bodily injury at work, D&O insurance won’t cover their medical expenses or lost income while they recover.
Instead, you would need workers' compensation insurance, which pays for medical bills due to on-the-job injuries and related lawsuits. Workers' comp coverage is required in most states for businesses with employees.
Client injuries
If a client slips and falls at your business and ends up breaking a bone or suffering other damages, such as property damage, your D&O policy won't pay for their medical expenses and any resulting legal costs.
Instead, general liability insurance would help pay for the client's medical fees and any legal expenses. Many landlords require small business owners to carry this policy in order to sign a lease.
Business owner’s policy (BOP)
Workers' compensation insurance
Errors and omissions insurance
Cyber liability insurance
Employment practices liability insurance
Other common questions about D&O insurance
How do you get a certificate of insurance?
TechInsurance is a trusted insurance expert for all small business owners, including contractors and consultants, with extensive knowledge of the IT sector and beyond. Our licensed insurance agents are available to answer your questions and help you find the coverage that's right for your business needs.
You can purchase D&O insurance as a standalone policy or as an endorsement to a general liability policy or a business owner's policy (BOP).
With TechInsurance, you can easily download a certificate of liability insurance for your small business, often on the same day you buy D&O coverage or another insurance product.
This comes in handy for companies, consultants, and nonprofit organizations that need proof of insurance to sign a contract or a lease and don’t have time to call an insurance company for documentation. Clients and landlords may ask for a certificate of D&O insurance or other types of business insurance to show you’re insured.
How does directors and officers insurance work?
Your board members and officers are at constant risk of lawsuits arising from hiring and firing decisions, trademark issues, and mismanagement of funds. Without D&O insurance, they're left without any insurance protection, as general liability and professional liability policies do not cover these D&O risks.
If an employee or shareholder sues them, D&O insurance provides protection by covering major expenses, such as attorney fees, judgments, settlements, and other costs related to the lawsuit.
It's also important to remember that shrinking limits can impact your policy, meaning that for every dollar you spend on legal defense, that's less money available for settlements. This is essential to remember when determining how much coverage to carry for your decision-makers.
A D&O insurance policy benefits your business because it ensures:
- Board members aren’t putting their personal finances at risk to work with your company.
- Your business has the liquidity to compensate investors for mismanaged funds.
- Your business is protected from claims made by stockholders, employees, clients, or regulatory bodies.
Keep in mind that D&O coverage is a claims-made policy, meaning your policy needs to be active when a claim is made, otherwise your insurance provider will not cover it.
What does side A, B, and C mean in D&O insurance?
A D&O policy consists of three insuring agreements between the policyholder and the insurance provider:
- Side A: Side A coverage offers financial protection to individual directors and officers who would otherwise have personal liability in the event of a lawsuit, including out-of-pocket expenses.
- Side B: If a business indemnifies its directors and officers, the business would cover their legal expenses and then receive reimbursement from the insurer.
- Side C: Also known as entity coverage, Side C only covers securities claims for public companies, while offering broader coverage for private companies and nonprofits.
Check with a TechInsurance agent to get the right coverage for your business's unique needs.
Which industries need directors and officers insurance coverage?
All businesses with a board of directors should consider carrying directors & officers insurance. These industries in particular often benefit from this policy:
- IT and technology. Shareholders and investors in technology businesses and startups will often request or require D&O coverage to protect members and officers against potentially risky decisions made in the IT sector.
- Consulting. Consultants frequently rely on their board of directors for guidance and direction, which can expose directors to liability. Insurance coverage is an important part of protecting board members during this process.
- Real estate. A real estate business board of operations may offer advice or suggestions that could lead to losses, making D&O coverage necessary to protect them from liability costs.
- Healthcare. Hospitals, medical parks, and other healthcare businesses often need to be exceptionally cautious about their business decisions due to HIPAA and other privacy-related considerations. This makes D&O insurance crucial for important healthcare decision-makers.
Can my business bundle D&O insurance with employment practices liability coverage?
Yes. In fact, some insurance providers offer a discount when you bundle your directors and officers coverage with employment practices liability insurance (EPLI).
This combined management liability insurance bundle provides key coverage for lawsuits arising from management, employee rights, and decisions made by your executive team.
What is the difference between directors and officers coverage and management liability insurance?
D&O insurance is a type of management liability insurance. To fully protect your business, we recommend bundling your D&O coverage with other management liability policies. Not only will this protect your executive team's personal assets at your company, but it can also help attract top talent by offering peace of mind that others may be seeking.
It's important to remember that D&O only covers risk related to decisions made by your board members and officers. To protect your managers and other employees at your business, you should consider getting other types of small business insurance policies.
How does D&O insurance differ from professional liability coverage?
Directors and officers insurance provides legal and financial protection for a company's board members and officers for the advice they give and the decisions they make in their capacity as directors or officers.
Professional liability insurance protects professional service providers from claims of unsatisfactory work and lawsuits arising from such claims. Generally, these lawsuits are brought by dissatisfied clients against your businesses or employees seeking to recoup losses they claim result from poor professional advice.
Both policies protect professionals who make key decisions and offer advice and perspectives in a work capacity. But each policy covers different people over different claims and risks.