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What is Directors And Officers Insurance?


Directors and Officers liability insurance is a specific type of coverage that serves to protect individuals in leadership positions in most types of organizations. This can safeguard them from any personal losses they may suffer if they face legal action as a result of their role as an officer or director of a company, non-profits, or educational institution.

Does Your Company Need to Buy D&O Coverage?

Any company that has an advisory committee or company board should buy D&O coverage. Regardless of its revenues or size, your company officers and/or directors are at risk of being sued over their management (or perceived management) of the business, and for this reason, buying D&O insurance can offer many benefits. Non-profits, educational institutions, and businesses with fewer assets could in fact need to buy D&O coverage just as much as any large corporation.

Business leaders can be held responsible if an organization fails to comply with regulations to provide a secure and safe place to work. If a business is found to be liable, due to mismanagement or operational failures, the officers, directors, and other staff with leadership or supervisory responsibilities could be exposed to further liabilities as well.

Here are a few examples of the types of claims that may target an organization and its leadership.

  • Non-compliance with laws or regulations
  • Investor or creditor suits over mismanagement
  • Shareholder suits over stock or company performance
  • HR or employment practice issues
  • Cyber liabilities
  • Decisions that exceed the authority granted to an officer of the business
  • Competitor claims
  • Insolvencies
  • Corporate manslaughter
  • Divestitures
  • Pollution claims
  • Misrepresentation of the organization at outlined in a prospectus

What is a Directors and Officers Liability Insurance Policy (D&O)?

This type of insurance coverage for company directors and officers can provide essential financial protection in case of a lawsuit; it can cover the cost of any legal fees along with any other incurred costs that arise as a result of a lawsuit. This may include but is not limited to defense costs, judgments, and settlements arising from lawsuits and allegations of wrongful acts.

Who is covered by a D&O policy?

A director's and officer's insurance policy will provide coverage for employees who work in a supervisory or managerial capacity, non-executive directors, officers, and any past, present or future company directors. While the definitions will vary between insurance providers, it is generally in place to provide coverage for any individual who has decision-making capabilities, and it applies to these individuals whether they hold these positions in the past, the present, or the future.  

What is covered by a D&O policy?

The main provisions of D&O insurance will provide coverage for costs and expenses of an ‘insured,’ including defense costs and settlements; it will also cover allegations of any wrongful acts, and financial losses, where the ‘insured’ is liable.

This type of insurance policy can be written to provide coverage for non-profit firms, for-profit companies, privately held businesses, and educational institutions.

There are a number of different elements to a D&O insurance policy that are often referred to as ‘sides.’  Here is a breakdown of each.

SIDE A

This will provide protection to officers and directors when the business itself is unable to indemnify the individuals.

SIDE B

This will reimburse the business or institution when it indemnifies the individual concerned and will, therefore, help to protect the balance sheet of the organization.

SIDE C

This is also referred to as entity coverage, and it will essentially eradicate any coverage allocation disputes when both the officers and directors and the ‘insured’ are each named as a co-defendant as part of a securities lawsuit.

What is not covered by a D&O policy?

There are various exclusions in a director's and officer's insurance policy, and each provider will have their own specifics. Here are the most typical exclusions that could apply to a D&O insurance policy.

  • Fraud
  • Prior and pending litigation
  • Personal profiting or illegal remuneration
  • ERISA
  • Penalties and Fines
  • Any claims that were made under a previous insurance policy
  • Insured Vs. Insured claims
  • The accounting of profits
  • Property damage and/or bodily injury
  • Legal action already underway when the policy is taken out

What are the advantages of buying D&O insurance?

Apart from the distinct advantage of paying out for any claims that could be brought about against the leadership of the business, there are other benefits of buying a D&O insurance policy.

Securing Investment – If you want a private equity firm or VC to invest in your business, then they will typically ask for you to have a D&O insurance policy in place first.

Attract and Retain Top Leadership – If any potential recruits or existing leaders feel they are exposed to personal liabilities, this may jeopardize your recruitment or retention efforts. Buying D&O insurance can help to mitigate this challenge and provide the leadership team with reassurance and support.

Covering Legal Expenses – Regardless of whether or not your director and/or officers are found to have done anything wrong, the cost of covering a legal defense can be high. With a D&O insurance policy, the legal fees of your business will most likely be covered.

How to buy a D&O policy for your company

There are numerous types of D&O insurance policies that are typically defined by individual liabilities, legal expenses, and other exposures that are needing to be covered. You should choose your D&O coverage according to your organizational risks and structure. The articles of incorporation for your business along with any company bylaws could provide specific indemnifications or protections for the company’s leadership.

Getting quotes to buy D&O should always be done via an expert commercial insurance agent. For added peace of mind that you are choosing the right type of insurance, and additional guidance with respect to coverage limits and endorsements, it is always preferred to speak directly with a quality insurance professional who understands the complexities of D&O insurance.


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