What is directors and officers liability insurance?
Directors and officers liability provides financial protection for past, present and future directors and officers of for-profit or nonprofit companies from damages resulting from alleged or actual wrongful acts they may have committed in their positions. The policy provides protection in the event of any actual or alleged error, misstatement, omission, misleading statement, or breach of duty. In addition, some policies extend the same coverage to employees.
Directors & Officers Liability Insurance can usually include Employment Practices Liability (EPL) and sometimes Fiduciary Liability. EPL involves harassment and discrimination suits, and is where the majority of your exposure will be.
Directors and officers liability insurance is needed when a board of directors is assembled. Investors usually require that you have directors and officers liability insurance as part of the conditions for funding your company.
Who generally purchases directors and officers liability insurance?
Any publicly traded company with a corporate board or advisory committee should consider director and officers liability insurance. Non-profit organizations and private companies could benefit as well from the protection offered by directors and officers liability insurance.
Investors, especially Venture Capitalists, will also usually require that you show evidence of Directors & Officers Liability insurance as part of the conditions of funding your company.
Also having employees opens management up to employment practices lawsuits – which usually can be covered under D & O insurance.
Why buy directors and officers liability 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 responsible for acts of the company, most directors and officers will want to be covered rather than risk their personal assets.
Investors and members of the board of directors will not risk their personal assets to serve as a corporate director or officer without directors and officers insurance coverage.
What does directors and officers liability 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 directors and officers liability insurance.
Exclusions
A directors and officers liability insurance policy covers defense expenses and financial damages or settlements. The policy does not cover wages, fines, taxes, penalties, or multiplied damages.
Directors and officers liability insurance vs. professional liability insurance or errors and omissions coverage.
Directors and officers liability insurance is often confused with professional liability insurance or errors and omissions coverage. The two are not the same; professional liability/errors and omissions coverage applies to performance failures and negligence with respect to products and services, not the performance and duties of the executive team (as with directors and officers liability insurance).
In summary, here are the reasons why you need Directors & Officers Liability Insurance:
- The personal assets of Directors & Officers are at stake! Directors & Officers insurance can help protect a board member’s home, 401(k), or other personal assets.
- Immunity does not prevent an organization from being sued. These suits can have a devastating impact on the organization’s operating budget and can even put it out of business.
- The entity and board are exposed to employment discrimination and harassment claims from volunteers as well as employees.
- Directors and Officers coverage is money well spent considering the cost to defend the average claim exceeds the budget of many organizations.
