D&O insurance – an introduction
One of the most discussed and least understood insurance products is Directors & Officers or D&O insurance. Headlines are full of stories about “mega claims” of several billions of dollars. While major publicly listed companies have the highest risk of attracting D&O insurance claims, any entity, whether public or private, as well as any non-profit organization, has potential d&o insurance exposure. d&o insurance is needed when a board of directors is assembled. Investors usually require that you have d&o insurance as part of the conditions for funding your company.
What is d&o insurance and why is it important?
Managers can make mistakes, and may be held personally legally liable for them. D&O insurance protects past, present and future directors and officers of for-profit or non-profit companies from claims which may arise from alleged or actual wrongful decisions and actions taken within the scope of their duties. A d&o insurance policy provides personal liability coverage for directors and officers. It may also be structured to cover the reimbursement of the insured company in case it has paid the claim of a third party on behalf of its managers in order to protect them
Who generally purchases d&o insurance?
Any publicly traded, private or non-profit organization with a corporate board or advisory committee should consider d&o insurance.
Why buy d&o insurance?
Claims from employees, clients and stockholders may be made against any company and against the directors and officers of a company. Since a director or officer can sometimes be held personally responsible for acts of the company, most will want to be covered rather than risk their personal assets. Members of a board will not risk their personal assets to serve as a corporate director or officer without d&o insurance coverage.
What does d&o insurance cover?
Criminal, administrative, civil, and regulatory proceedings based on actual or alleged acts, errors, omissions, misstatements, neglect, or breach of duty committed or allegedly committed by a director or officer are covered with d&o insurance.
Exclusions
A D&O insurance policy covers defense expenses and financial damages or settlements. The policy does not cover wages, fines, taxes, penalties, or multiplied damages.
D&O insurance vs. professional liability insurance or errors and omissions coverage.
D&O insurance is often confused with professional liability insurance or errors and omissions (E&O) coverage. The two are not the same; professional liability/E&O coverage applies to performance failures and negligence with respect to products and services, not the performance and duties of the executive team (as with D&O insurance).