Though often associated with large, publicly traded companies, Directors and Officers insurance (D&O insurance) is increasingly important for small businesses as well. In this guide, we’ll cover all the key facts about D&O insurance, including what’s covered, what’s not covered, typical costs and common examples.
Please bear in mind, this guide is not written by a lawyer or insurance broker. For answers related to your specific situation, be sure to consult a lawyer or certified broker.
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Our Recommended D&O Insurance Provider: AJ Gallagher
There’s a huge range of factors that come into play when selecting a D&O policy. Claims limits, types of coverage, and payment terms are just a few examples. Because every business has different needs, we recommend speaking with AJ Gallagher, a matchmaking service.
AJ Gallagher partners with hundreds of carriers nationwide. They’ll first get on the phone with you to learn about your specific needs, then scan their network for the perfect policy. Consulting with AJ Gallagher is completely free, and you can get started just be following this link.
What Is Directors & Officers Insurance?
Directors & Officers Insurance (D&O) protects company leaders in the event that they are sued by investors, employees, vendors, customers or even competitors. Directors and officers can be held personally liable if their negligence or poor judgement causes a loss of profit. In such an event, D&O insurance covers defense costs and payment of claims.
How Much Does D&O Insurance Cost?
The cost of a D&O policy varies depending on your industry, revenue, debt and legal history. Also, like most insurance policies, there’s both a premium (or, monthly payment for coverage) and a deductible (or, amount you must pay out-of-pocket before coverage “kicks in.”) Finding a policy with a higher deductible can usually get you a lower monthly premium, and vice versa.
A low-risk business could pay as little as $500/year (in premiums) per $1 million in coverage. For a high-risk business, the cost could be as much as $10,000. Most businesses pay halfway in-between, according to Advisen, with a typical policy limit of $2.6 million running a tab of about $16,000 per year (or about $6,600 per $1 million in coverage).
Directors & Officers Insurance: A Detailed Look
Directors, officers, business owners and other company leaders are expected to follow certain standards of conduct. Known as fiduciary duty, this includes an expectation to act loyally and in the best interest of their company.
They’re also expected to act on a reasonably informed basis every time a decision is made. Failure to do so can be considered a violation of fiduciary duty. Inaction, or failure to make a decision at all, can likewise be violation. In such instances where a violation results in loss of profit, directors and officers can be held personally liable. Their personal assets can be at stake.
This doesn’t mean directors and officers are liable for every mistake they make. A common defense would be to prove you were acting in good faith or good judgement, even though the outcome was negative. Nonetheless, a lawsuit can be an expensive and time consuming hassle, even if it ends in your favor.
This is why many company leaders seek to protect themselves with D&O insurance. By covering your defense costs, settlements, and – in some cases – even overseeing your defense strategy, D&O insurance gives you a strong level of protection (provided you aren’t found guilty of any crimes.) Executives may expect D&O insurance as a prerequisite before they’ll even consider joining your company. Likewise, venture capitalists may expect to see it before offering an investment.
D&O Examples
Here are some common examples of cases where D&O insurance is applied:
- Employment Practices Liability – This is the most common type of claim among private companies. Directors and officers can be held personally liable in cases of workplace discrimination, harassment, or wrongful termination.
- Bankruptcy. In the event that your company files for bankruptcy, investors, lenders, and even customers can sue your company if A. they suffered a loss of profit as a result of your bankruptcy and B. they feel the bankruptcy was a result of negligence or misconduct.
- Employee Piracy. Say an employee leaves a company to start a competing business – the previous company may sue them over theft of intellectual property or trade secrets. This is why some venture capitalists won’t fund startups unless they have a D&O insurance policy already put in place.
What Does D&O Insurance Cover?
D&O insurance covers a wide range of unintentional wrongful acts, including omissions, misstatements and discrimination. The 2 main ways D&O insurance reimburses policyholders are:
- Payment of claims
- Defense costs
Additionally, some carriers may even take up your case. They may hire counsel on your behalf and oversee the defense strategy.
Exactly who is covered at your business depends on the level of protection you purchase. D&O insurance is broken up into 3 subtypes known as “Sides”:
- Side A covers individual directors and officers.
- Side B covers the company if they choose to support (or “indemnify”) their directories and officers.
- Side C covers the company in their own right, in the event that they’re being sued for something that isn’t covered by their commercial liability insurance.
Timeframe of Claims
D&O insurance typically covers any claims that were filed during the policy period. It doesn’t matter when the negligent act itself occurred – just when the claim was filed.
What Does It Not Cover?
D&O insurance does not cover intentionally illegal acts. For example, it will not cover fraud, embezzlement or decisions made for intentional personal gain.
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The Bottom Line
Purchasing D&O insurance is an important step for growing businesses. You may find it’s necessary to attract the right talent, or even to spark the interest of investors. Because of the huge range of options out there, we recommend speaking with AJ Gallagher. As insurance brokers, they can answer more specific legal questions and walk you through the options. To get in touch, just follow this link and submit the form.
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