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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.
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.
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.