Directors and officers liability insurance (D&O insurance) is a type of liability insurance that protects the individual directors and officers of a company from personal financial losses in the event that they are sued for wrongful acts in their capacity as directors and officers. The coverage provided by D&O insurance typically includes the costs of defending against lawsuits, as well as any damages or settlements that may be awarded.
What Is the Purpose of D&O Insurance?
The purpose of D&O insurance is to provide financial protection to the directors and officers of a company, allowing them to carry out their duties with the confidence that they will not face personal financial effects in the event of a lawsuit. This type of insurance can be especially important in highly regulated industries, where the risk of lawsuits is higher, and in situations where the company itself may not have sufficient resources to defend against such claims.
D&O insurance policies can be purchased by the company itself, or by the directors and officers individually, and are usually written to cover a variety of different types of wrongful acts, including breach of contract, mismanagement of company finances, and discrimination or harassment.
Does D&O Insurance Cover Intentional or Willful Conduct?
D&O insurance policies do not cover intentional or wilful conduct on the part of the directors and officers. Most D&O insurance policies contain exclusions for intentional or criminal acts, as well as for fines and penalties imposed by regulatory agencies. This is because the purpose of D&O insurance is to provide protection against lawsuits that may result from errors or omissions made in good faith, rather than to indemnify directors and officers for deliberate and illegal actions.
What Are Some Common Examples of When D&O Insurance Is Needed?
D&O insurance is normally needed in situations where the directors and officers of a company face a high risk of personal liability for their actions in the performance of their duties. Some common examples of when D&O insurance is needed include: (1) Mergers and acquisitions, directors and officers may be personally liable for any misstatements or omissions in the due diligence process or in the representations made to the other company; (2) securities lawsuits, which is when a company is publicly traded, its directors and officers may be sued for violations of securities laws, such as insider trading or fraud; (3) environmental claims, which relates to industries with potential environmental liabilities, such as oil and gas, directors and officers may be sued for environmental violations, including pollution or the release of hazardous substances; (4) employee claims, which applies when directors and officers may be sued for wrongful termination, discrimination, or harassment of employees; (5) regulatory investigations, which applies when directors and officers may be held personally liable for fines or penalties imposed by regulatory agencies for violations of laws or regulations, such as anti-trust or consumer protection laws; and (6) shareholder lawsuits, which applies when directors and officers may be sued by shareholders for actions that harm the company or result in financial losses for the shareholders.
Who Can Be Covered Under D&O Insurance?
D&O insurance covers the directors and officers of a company. This can include: (1) corporate directors, who are members of the board of directors who are elected or appointed to oversee the management and direction of the company; (2) corporate officers, who are individuals who hold positions of authority within the company, such as the CEO, CFO, and other senior executives; (3) non-executive directors, who are independent directors who serve on the board but do not have a management role in the company; (4) former directors and officers, which may provide coverage for former directors and officers for wrongful acts committed while they were in office; and (5) non-profit organizations.
It is important to remember that in some cases, additional insureds, such as the company itself or its subsidiaries, may also be covered under a D&O insurance policy. However, officers and directors should amend the terms of the insurance if they wish to include the company itself or its subsidiaries in the policy.
Does D&O Insurance Cover Actions or Claims From Members of the Same Company?
D&O insurance policies will cover actions or claims brought by members of the same company, such as shareholders, employees, or other directors and officers. These types of claims are referred to as “intra-insured” claims and are usually included in the coverage provided by D&O insurance policies.
It is important to note that while intra-insured claims are generally covered, the specific terms and conditions of a D&O insurance policy will dictate the scope of coverage provided. Some policies may contain exclusions for certain types of intra-insured claims, such as those arising from shareholder derivative lawsuits. Additionally, some policies may have sub-limits or other limitations on the amount of coverage available for these types of claims.
In order to ensure that they have adequate protection, companies and directors and officers should carefully review the terms of their D&O insurance policy and understand the coverage provided for intra-insured claims
Who Pays for the D&O Policy?
The cost of a D&O insurance policy is typically borne by the company that is being insured. This is because the purpose of the policy is to provide protection for the company’s directors and officers in the event that they are sued for wrongful acts committed in the performance of their duties. Sometimes the company may require its directors and officers to contribute to the cost of the policy, or it may provide coverage for them as a benefit of their employment. Additionally, in the case of public companies, the cost of D&O insurance may be included in the overall compensation package for the directors and officers.
The cost of a D&O insurance policy can vary depending on a number of factors, including the size and financial stability of the company, the industry in which it operates, and the specific risks faced by the directors and officers. Companies should work with their insurance brokers to determine the appropriate level of coverage for their needs and to obtain a policy that provides the best protection at a reasonable cost.