What Is Director's and Officer’s Insurance?

By Floyd Arthur

Director’s and officer’s insurance (also known as D&O insurance) is liability insurance that covers directors and officers of a company for claims arising from actions performed while serving in their official capacity. It is similar to an errors and omissions policy in that it covers claims that result from professional decisions that have negative financial consequences. However, it applies only to decisions and actions of board members and C-level management staff.

What Does D&O Insurance Cover?

Many business executives mistakenly believe that D&O insurance is designed specifically for publicly owned companies and provides coverage only for securities-related claims. However, this is not at all true. Although D&O insurance covers C-level employees whose actions result in financial damages to the company’s stockholders (for instance, a sudden drop in the stock price) it offers other protections as well. For example, D&O insurance includes coverage for:

• Allegations of fraud, such as when a lender claims a senior manager misrepresented the company’s ability to repay a loan, and the company subsequently defaults.
• Allegations of misconduct, such as a claim alleging that the company’s officers were negligent in failing to notice or report violations of federal environmental policy, resulting in regulatory action by the EPA.
• Allegations of wrongful termination of a high-level employee due to the improper actions of other C-level executives
• Customer or client allegations of systematic wrongdoing by the company that board members failed to deter
• Intellectual property disputes involving the actions of high-ranking executives
• Any allegation by a stakeholder that C-level employees or board members failed to perform in a manner that was consistent with their “duty of care” and loyalty to the organization

Director’s and officer's’ insurance can be written for most business entities, including educational institutions, non-profits, private for-profit businesses and publicly owned firms. Policy forms for non-profits offer the broadest level of coverage and typically include employment practices liability insurance and coverage for the organization as a whole.

What Are the Limitations of D&O Insurance?

D&O insurance is an important adjunct to a commercial general liability coverage; however, it has limitations. These include:

• Limited Coverage for the Organization: Generally, D&O coverage forms for publicly held companies cover only the actions of the directors and officers. There is limited protection for the company as a whole, and what protections exist only cover securities-related claims. On the other hand, coverage for private firms is usually more comprehensive, and often includes some coverage for the organization itself.

• Shrinking Defense Limits: Unlike most commercial general liability policies, D&O insurance is typically written with “shrinking defense limits,” which means defense costs are subtracted from the maximum indemnification the policy allows. In other words, any damages paid by the insurer are reduced by the amount of litigation costs and attorney’s fees. In the event of a lengthy lawsuit, this can mean a significant reduction in the amount the insurer pays on the claim itself.

• Duty to Pay Versus Duty to Defend: Typically, D&O insurance policies contain a “duty to pay” rather than a “duty-to-defend” clause. Under most CGL policies, the insurer has an explicit duty to defend against any claim, even if it the claim is ultimately denied. This includes the obligation to “assume control” of the defense process, including selecting counsel and paying legal bills. Under the “duty to pay” clause, the insurer is only required to reimburse the insured for his defense costs.

• Claims-made Versus Occurrence Trigger: D&O policies are typically written on a “claims made” basis, which means that coverage applies only to claims that are submitted to the insurer during the period the policy was in force. Thus, if the policy term is from Jan. 1, 2016 to Jan. 1 2017, the insured is covered only for claims submitted to the insurer during that year. By contrast, “occurrence-based” policies cover the insured for claims that occur during the policy period, regardless of when the claim is made.

Deciding how much and what kind of insurance to purchase for your business is a complex and difficult process. For that reason, many firms wind up under-insured. Don’t let your lack of experience in insurance matters undermine your firm’s financial security. Get a comprehensive business insurance review today. Our experts are available every weekday from 9 a.m. to 6 p.m., so call us at 516-292-3780 to schedule an appointment. Or if you prefer, request a free consultation online now.

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