3 Reasons Why Your Business May Need D&O Insurance

Directors and officers (D&O) liability insurance primarily protects directors and officers in the event they are sued by third parties for alleged or actual wrongful acts they commit in managing a business or nonprofit organization. D&O insurance also protects the entity from any financial losses it incurs as a result of wrongful decisions or actions by its directors and officers. There are several reasons why your company or organization may need to purchase D&O insurance. 

Limit your D&O liability risk

In running your company, your directors and officers make critical decisions that can impact many parties. These executives may be sued personally by employees, vendors, competitors, shareholders, investors, customers and government agencies over their management of the company. Allegations may include misrepresentation of company assets, misuse of company funds, breach of fiduciary duty, wrongful termination, harassment/discrimination, theft of intellectual property, fraud, poaching competitors’ customers, securities violations, violations of workplace laws, negligent hiring, negligence in protecting personal information or other confidential data, and others. For covered events, D&O insurance covers legal fees, settlements and other costs, which can quickly add up, particularly in the case of a class action lawsuit. D&O insurance limits your entity’s exposure while allowing your leadership to focus on making the best possible decisions for your company without fear of risking their personal assets. 

Attract top talent

The market for top-quality executives and board members can be highly competitive. Many established executives will not consider joining a company or organization as an officer or director if it means putting their personal assets at risk. Therefore, you may need to have a D&O policy in place in order to attract and retain top talent.

Attract investors

Many businesses seek funding from venture capital or other investors in order to get to the next level. Investors want to protect their investment, and many will stipulate that a D&O policy needs to be in place as a condition for providing financing. Often, investors will require a seat on the company’s board of directors in order to oversee their investment and will require D&O insurance in their capacity as a director.

Policy limitations

It is important to note that, like all insurance products, D&O policies have exclusions. Typically, a D&O policy will exclude coverage for illegal, dishonest and criminal conduct, including actions aimed at gaining illegal profits, such as insider trading. However, as directors and officers are generally presumed innocent of charges of dishonest or criminal activity, the insurance will cover defense costs until individuals admit wrongdoing or a final court adjudication is made against them. D&O policies also commonly contain an insured vs. insured exclusion, which precludes coverage for claims brought by one director or officer against another. Policies with this exclusion may include carve-backs for specific situations in which coverage for insured vs. insured claims is allowed. Another common exclusion is claims or activities that were known about prior to the purchase of the policy. Risks that are expected to be covered by other types of business insurance are also typically excluded from D&O coverage. Additional exclusions may also apply; it is important to examine your policy carefully so you can understand what you do and do not have coverage for. 

If you are involved in a dispute with your business insurance company, contact us. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.