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Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company. Many officers and directors will want a company to provide both indemnification and D&O insurance.
Directors and officers are sued for a variety of reasons related to their company roles, including:
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Misrepresentation of company assets
- Misuse of company funds
- Failure to comply with workplace laws
- Theft of intellectual property and poaching of competitor’s customers
- Lack of corporate governance
Illegal acts or illegal profits are generally not covered under D&O insurance.
Does Your Business Need D&O Coverage?
It’s a common misconception that D&O claims are mostly a public company phenomenon. In fact, a recent Towers Watson survey showed that public, private, and non-profit companies all face D&O litigation risks.
Lawsuits are all too common these days. According to the Chubb 2013 Private Company Risk Survey PDF (1 MB), the average total cost of D&O lawsuits to companies is $697,902, including judgments, settlements, fines and legal fees. Without sufficient insurance coverage, defending a lawsuit could be financially devastating to your company and your directors and officers.
Any business with a corporate board or advisory committee should consider investing in D&O insurance, including non-profit organizations. Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.
First, consider the following:
- Despite the high risk of personal and business financial liabilities from lawsuits, the Chubb survey found just 28% of businesses have purchased D&O insurance. One reason is that 65% of executives mistakenly believe their companies are protected under their general liability or umbrella business insurance policies. But those policies are not designed to cover management missteps and do not provide the same protections as D&O insurance.
- If you are looking to secure venture capital or funding from investors, you will most likely need to have D&O coverage in place, as a form of protection for the investors.
- Similarly, if you want to attract and retain qualified directors, D&O coverage will protect those who might otherwise be reluctant to put their personal assets at risk.
Then, consult an insurance professional who specializes in D&O coverage to determine where your liability coverage gaps are.
Originally Published at TheHartford.com