Cyber Insurance Blog

How to Explain Directors and Officers Insurance

What is Directors and Officers Coverage?

Individuals on a company’s or an organization’s board are accountable for acting in the company’s or its clients’ best interests. This responsibility is called fiduciary duty.

When it’s breached, individuals can be held personally liable for defense and settlement costs.

Six members of a corporate board sit around a table listening to one man explain Directors and Officers insurance.

Directors and Officers (D&O) Insurance is a liability policy covering the board of directors, officers, and entity itself from claims stemming from decisions that go against the board or jeopardize the company. It saves board members from paying out of their personal assets.

Knowing how to explain Directors and Officers Insurance to clients is vital for brokers who want to get them the coverage they need.

In this blog, we’ll break down this coverage’s basics: who and what it covers, what goes into a policy, and why all businesses and organizations should secure it.

Who Needs D&O Insurance?

The risks and needs businesses face vary depending on their nature. But whether a company is large or small, public or private, D&O Insurance is important.

Public

A publicly traded company must be aware of myriad exposures. Satisfying shareholders and complying with SEC regulations both pose numerous risks. Bankruptcy numbers are climbing in 2021, and the risk of a lawsuit for breach of fiduciary duty continues to climb as well.

Businesswoman speaks about what goes into a Directors and Officers policy at conference table as three male colleagues listen.

D&O Insurance can also be an indirect benefit. It can help attract experienced directors and officers to a company.

Private

While not every private company carries D&O coverage, as they often face smaller risks as compared to a publicly traded company, they still do have risks to consider. They must consider the risk of regulatory exposures, employee lawsuits, or suits from other shareholders around management or mismanagement of the company.

Directors and Officers liability insurance is important for any company looking to expand or preparing for an initial public offering (IPO).

Additionally, some investment firms require their portfolio companies to purchase D&O Insurance as a condition of investment.

Non-profit

While non-profits function differently from public or private businesses, they can still face significant liability exposures.

Besides carrying the same risks as any organization with employees, directors and officers are also beholden to their donors and beneficiaries. In the event of a lawsuit, an uncovered individual could be on the line for far more than their net worth.

Who is Covered Under Directors and Officers Insurance?

Directors and Officers insurance naturally covers two primary groups.

The first group is directors, whom shareholders elect. The second group is officers, whom directors appoint.

Three businesspeople discuss what Directors and Officers insurance covers at table with notebooks and laptop computer.

In most cases, D&O policies don’t cover employees. The exception to this general rule occurs when such an employee is made a co-defendant with a covered director or officer.

What Does Directors and Officers Insurance Cover?

D&O Insurance covers claims ranging from a shareholder action for breach of fiduciary duty to a creditor’s claim alleging misrepresentation. Any entity who believes they’ve sustained losses due to the board or officers’ failures can file a D&O claim—shareholders, stakeholders, employees, vendors, and clients.

Other examples of claims include:

Breach of contract
Employee harassment
Discrimination
Misuse of funds
Losses due to bankruptcy

Still, brokers must know how to explain the limits and exclusions of Directors and Officers insurance to policyholders.

Unsurprisingly, intentional fraud is one such exclusion. Depending on the carrier’s risk appetite, the accused company may have to pay for any legal fees and counsel from a claim, as well as a resulting settlement. However, in a highly favorable policy, personal liability may only extend to settlements due after final adjudication. A favorable policy may also include a severability clause stating that knowledge of material, false statements in the application that is possessed by one insured will not be imputed to other insureds.

The other main exclusion is an “insured vs. insured” claim. This exclusion means D&O Insurance won’t cover directors and officers who bring claims against one another.

What Goes Into a Directors and Officers Policy?

Policies generally include 3 separate protections, known as sides a, b, and c.

These sides exist to provide comprehensive coverage for policyholders, as it can’t be known which coverage a claim will trigger until it’s filed.

Legality of payment also comes into play, depending on whether a business is permitted to indemnify board members.

Side A

Side A is person protection coverage. It protects directors’ and officers’ assets directly by paying on their behalf, with the carrier supplying the funds out-of-pocket. Claims where the carrier indemnifies the director or officer directly fit this scenario.

Side B

If side A is direct coverage, side B is indirect. In some regulatory situations, a corporation can’t indemnify its directors. In this case, instead of the insurance policy paying directly, the company pays, and the carrier reimburses.

Side C

The final side of coverage protects entities when a claim names no single director. This side is common for both public and private companies and deals mostly with securities claims. The entity coverage rounds out the policy, giving directors and officers robust personal protection from liability.