The personal assets of the leadership of all for-profit and nonprofit organizations are vulnerable to litigation exposure, typically related to managerial decisions resulting in negative financial consequences.
Directors and Officers Insurance, more commonly known as "D&O" or "D&O Liability Insurance," protects your company’s officers from claims made against them in the performance of duty.
Claimants will base their lawsuits on a wide variety of issues, but the most common is a breach of fiduciary trust and violations of securities law.
Directors and Officers Liability Insurance Overview
Your officers are usually protected thanks to indemnification provided, but not always — like in the case of bankruptcy or insolvency. D&O protects your officers with or without indemnification.
D&O insurance comes with three main protections: Side A, Side B, and Side C.
Side A Coverage
Protects executives when indemnification isn't available for either financial or legal reasons.
- Specifically, Side A protects your directors' and officers' personal assets because they are not being indemnified by the company in these types of claims.
Side B Coverage
Reimburses your company's indemnification obligations, thus protecting the bottom line.
- Under proper terms and conditions, Side B effectively transfers the organization's obligation to the insurer.
Side C Coverage
Protects your company from its own liability.
- The majority of D&O lawsuits will name the company in addition to a specific director and/or officer.
What are the benefits of D&O coverage?
- Saves money spent on litigation. Lawsuits can cost ungodly amounts of money, weill into (and beyond) hundreds of thousands of dollars — and that’s if you settle out of court. D&O insurance covers your legal fees.
- Protects against multiple vulnerabilities, such as government entities, competitors, customers, and shareholders. Common litigation triggers include mergers and acquisitions, perceived financial weakness, and possible conflicts of interest.
- Helps attract and retain the best talent. Ensures the security of your directors' and officers' assets, as well as the assets of their families. Many leading executives will require a company to carry D&O insurance prior to joining the board.
The bottom line on D&O coverages & benefits
You should consider D&O insurance as soon as you have operations and a board of directors, especially in today's litigious climate. You want to protect your executive team and attract top talent, while affording them all the peace of mind to make the critical decisions for your company.
D&O is also frequently required for outside financing. The members of your board will want to know they're protected as you open the company to risk around fiduciary responsibility.
Want a complete walkthrough of D&O insurance, including a claims example? Check out our Ultimate Guide to D&O Insurance.
NOTE: The focus of this article is primarily related to D&O policies for private companies.