D&O Insurance: Coverage, Costs & Exclusions

Directors and Officers Insurance, or D&O Insurance, covers defense costs and payment of claims if directors or officers of the company are sued for alleged wrongful acts. The cost of D&O insurance varies based on how much coverage you need, and ranges from $5,000 to $10,000 per $1 million of coverage per year.

How Directors and Officers Insurance Works

D&O insurance is purchased by businesses to protect the personal assets of corporate directors and officers and to protect business assets from a claim that the business made poor decisions. With a D and O policy in place, businesses are better positioned to attract strong leaders, look more attractive to venture capital firms that often require this coverage before investing, and to cover their own legal costs if there is a claim.

D&O insurance is not included in a standard business owners policy (BOP), but most insurance providers will add the coverage. A BOP is a bundled package that typically includes general liability insurance, commercial property insurance, and business interruption insurance. Bundling coverage into one BOP reduces the overall cost compared to buying multiple policies separately.

What D&O Insurance Covers

D&O insurance covers legal fees, settlements, and other costs in the event directors or officers of the company are sued for alleged wrongful acts. Directors and officers of a company can be held personally liable for a breach of this fiduciary duty. A D&O policy also provides coverage for the company if it is required by statute or bylaws to indemnify directors and officers.

D&O insurance can protect against lawsuits brought on for a variety of reasons, including:

• Breach of fiduciary duty resulting in financial losses or bankruptcy
• Misrepresentation of company assets
• Misuse of company funds
• Fraud
• Failure to comply with workplace laws
• Theft of intellectual property
• Lack of corporate governance

Directors and officers can be personally sued by a variety of parties including employees, vendors, investors, and customers. Exactly who is covered at your business depends on the level of protection you purchase. For example, D&O insurance can be expanded to broader management liability insurance, which covers the corporation itself as well as the personal liabilities for the directors and officers of the corporation.

D&O insurance policies can provide a wide range of coverage types, according to Garth Gersten, Attorney, Shapiro Bieging Barber Otteson:

“A D&O policy provides coverage for individual directors and officers against claims for ‘wrongful acts,’ which are defined in the policy but may differ from insurer to insurer. This is known generally as Side A coverage—and can be purchased separately. A D&O policy also provides coverage for the company if the company is required by statute or bylaws to indemnify directors and officers. The policy also applies to other claims against the company itself, as for claims for violations of securities laws.”

D&O insurance is categorized into three subtypes known as “Sides”:

• Side A: Covers individual directors and officers in the event the business can’t indemnify them, as in the case of the business’ bankruptcy.
• Side B: Covers the company if they choose to support (or “indemnify”) their directors 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.

Most businesses, whether large or small, public or private, buy a combination of all three types of D&O insurance. However, the amount of coverage needed under each type will vary for each business. For example, a business that is well-capitalized and has a low risk of bankruptcy will not need as much Side A coverage as a business that is not well-capitalized.

As for the time frame 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. For example, if the act was committed in 2010 and the claim was filed in 2018, the claim would be covered, as long as the policy was in force at the time of claim.

What D&O Insurance Does Not Cover

Items not covered in an insurance policy are called exclusions. Most of the exclusions in a D&O insurance policy are intentional illegal acts. For example, a D&O insurance policy will not cover fraud, embezzlement or decisions made for illegal personal profit.

Here are common exclusions of a D&O policy, according to the Insurance Information Institute:

• Fraud
• Personal profiting
• Accounting of profits, and other illegal compensation exclusions
• Pending and prior litigation
• Prior (late) claim notice
• Bodily injury/property damage
• Insured versus insured claims

D&O insurance policies typically include “shrinking limits” provisions. This means that defense costs, which are typically the largest part of a claim, will reduce the policy’s limits. Shrinking limits provisions contrast with the approach of a commercial general liability policy, where defense is covered in addition to policy limits.

Who D&O Insurance Is Right For

D&O insurance is typically the best fit for businesses with high liabilities, those that need to attract quality executive leadership, and businesses with a board of directors. Executives, especially high-quality ones, may expect D&O insurance as a prerequisite before they’ll even consider joining your company.

Almost every business should consider getting D&O insurance coverage:

• Public and Private Businesses with a Board of Directors: Since general liability insurance and umbrella insurance don’t cover liability of a company’s board of directors, D&O insurance is needed to fill this gap. This includes small businesses.
• Nonprofit Organizations: Since they are managed by a board of directors, all nonprofits should have D&O insurance coverage, especially if they want to attract quality board members who would demand the coverage.
• Businesses with Large Liabilities: If a business owes more than $1 million to creditors, then it’s important to have this coverage to protect the business, the directors, and the officers in the event the business goes under. Creditors might point to the company leadership as to the reason they weren’t paid in full.

Certain industry types typically buy D&O insurance, including:

• Agriculture, Forestry and Fishing
• Mining and Construction
• Manufacturing
• Transportation, Communication, Electric, Gas and Sanitary Service
• Wholesale and Retail Trade
• Services
• Public Administration

According to Shanda Davis, D&O Product Manager for Bond & Specialty Insurance, Travelers:

“Any company or organization that includes a board of directors or officers—and those directors and officers individually—may be vulnerable to a number of D&O exposures, such as securities litigation, regulatory actions, allegations of misrepresentation and other breaches of fiduciary duties. As D&O claims become more common, protecting the assets of a business and the personal assets of its directors and officers is critically important.”

D&O Insurance Cost

The cost of a D&O policy varies depending on your industry, revenue, debt and legal history. For small- to mid-sized companies the cost of D&O insurance typically ranges from $5,000 to $10,000 per year in premium for each $1 million in coverage. Where your business falls on the cost range depends on a few key factors.

Here are the key factors that affect the cost of D&O insurance:

• Age or Maturity of the Business: A business with a long history and an experienced board of directors may pose a lower risk of litigation and therefore would have lower D&O insurance costs than a less mature business in the same industry.
• Industry Type & Size: Larger businesses in certain industries, such as a large financial services firm, will typically expose their directors and officers to more risk than a small, nonprofit business and would therefore pay higher premiums.
• Financial Stability: A well-capitalized business will have a lower risk of bankruptcy, which would require lower Side A coverage, compared to a business that is not as financially stable.
• Number of Employees: Most D&O claims originate from employees; therefore, a higher number of employees will typically translate to higher premiums.
• Coverage Amount: For every $1 million of coverage you want, you’re going to have to pay a minimum of another $5,000 in annual premium.

What to Look for When Buying D&O Insurance

Applying for directors and officers insurance can be relatively simple; however, you’ll need to do a little more homework on a D&O policy than most insurance types. This is because there are several inclusions and exclusions that may differ from insurer to insurer. To get a good idea of the right coverage and the best pricing, be sure to get quotes from at least three different providers.

Here are some key points to keep in mind to get the best D&O insurance policy for you:

1. Prepare Documentation Before Applying for D&O Insurance

Applying for D&O insurance is not difficult or time consuming if you have all of the information the insurance providers need. Insurance underwriters need to assess risk properly so that they can help cover your risks but also to properly price the D and O policy. For this reason, you’ll need to provide some sensitive information as part of the directors and officers insurance application process.

Here are some common items underwriters need to see for D&O insurance:

• Capitalization Table and Board Member List: The capitalization table shows percentage of ownership. If an owner does not have representation on the board of directors, an underwriter would see this as an increased risk of lawsuit from that owner.
• Financial Statements: For an accurate picture of your company’s current financial health and future outlook, underwriters will require year-to-date and past financial statements.
• Investor Identity: D&O underwriters sometimes want to know the identity of investors. For example, if the investors are family and friends, there is a lower risk of lawsuit.

2. Review the D and O Policy to Be Sure Your Greatest Risks Are Covered

Directors and officers insurance policies are not standardized products, which means each insurance carrier has different coverage. Also, the exclusions can be numerous. For this reason, it’s important to identify your greatest risks for lawsuits. Review your D&O insurance policy thoroughly to be sure you know what’s included and what’s not included, and that there are no coverage gaps.

Ask questions and completely understand what’s in your D&O policy, according to Damian Caracciolo, Vice-President, CBIZ Inc:

“Focus on coverage first and have your broker explain what is AND what is not covered by the policy. Never hesitate to ask questions about your coverage or how coverage may be impacted by your business decisions. Also ask what benefits are included in the policy. Often carriers will provide a number of free risk management services that can be very helpful.”

3. Try to Get “Prior Acts” Coverage in the D and O Policy

When reviewing the D and O policy with your agent or broker, be sure to see the extent that “prior acts” are covered. If possible, try to get coverage that dates back to the inception of your business. The reason for this is that lawsuits can arise from an incident prior to purchasing the policy. If there are prior incidents that could give rise to a claim, be sure to report this on your application.

Top Directors and Officers Insurance Providers

Four of the top directors and officers insurance providers are:

1. The Hartford

The Hartford is a large insurance provider with a history of offering a wide variety of commercial insurance types for businesses of all sizes. They are highly rated for their quality of service and specialized coverage types, including D&O insurance, which includes coverage for public and private companies, as well as nonprofit organizations. The Hartford can be a smart choice of provider for almost any business type that needs D&O insurance.

2. Travelers

Travelers is another large insurance provider that offers a wide variety of commercial insurance types, including directors and officers insurance. With regard to D&O insurance coverage, Travelers is a leading provider of Side A coverage, which is the type of D&O insurance that covers only the directors and officers.

3. Insureon

Insureon is an internet-based insurer that specializes in insurance for small business. Their directors and officers policy can benefit a small business, but Insureon also focuses on filling the need for D&O coverage for nonprofit organizations. On their website, they point to a study that reveals 60 percent of D&O claims involve nonprofits. Insureon can be a good fit for a small business with a board of directors or a nonprofit organization wanting to an internet-based insurer.

4. AIG

AIG is a large international insurance provider with 40 years of experience protecting businesses with D&O insurance. AIG handles 40,000 D&O claims per year worldwide and covers 80 percent of the companies in the Fortune 500 for directors and officers insurance. AIG is a good choice of insurer for large companies needing a D&O provider that has experience handling claims for big business.

Additional Types of Insurance You May Need

Even if Directors and Officers Insurance covers the biggest risks your business faces, there are other insurance types you may need. For example, businesses that have D&O insurance will also have coverage for third-party liability claims, property of the business, and benefits for their employees.

Here are details on four other insurance types you may need in addition to D&O Insurance:

1. Employment Practices Liability

Employment practices liability insurance (EPLI) protects businesses from claims arising from employment-related cases, such as discrimination and sexual harassment. EPLI coverage is not automatically included in a D&O insurance policy, but it is often added for a small addition in price.

For example, discrimination and sexual harassment can be significant risks for large businesses with many employees. Directors and officers can be sued for these incidents, whether they actually occurred or not. Speak to your agent or broker about adding EPLI coverage to your D&O policy.

2. Commercial General Liability

Commercial general liability (CGL) insurance covers third-party bodily injury, property damage and related legal costs. CGL is a common policy type purchased by all kinds of business, large and small. It’s important to note that bodily injury and property damage are often excluded from a D&O policy.

For example, if a third party, such as a customer or client, gets injured on your premises, you’ll need a CGL policy to pay medical bills and legal expenses, if applicable.

3. Commercial Property

Commercial property insurance protects against losses due to fire, theft, vandalism, and extreme weather. This is first-party coverage, which means it’s for your building and other assets, not that of a third party, which is covered by general liability insurance.

For example, if your building is damaged by fire, a commercial property insurance policy would cover the repairs, including repair or replacement of the contents, up to the policy limit.

4. Workers Compensation

Business that need D&O insurance typically have employees, which means they’ll need workers compensation, which is required coverage in most states for businesses with employees. Workers comp insurance provides benefits to your employees in the event of work-related injuries or illnesses.

For example, if one of your employees tripped and fell and was injured on your premises, your workers comp insurance would pay medical bills and wages from lost work time, if applicable.

Bottom Line

Directors and officers insurance is important coverage for any business that needs to protect their non-owner leaders, such as officers and the board of directors. Large, national corporations are not the only businesses that need this coverage. Smaller, growing businesses and nonprofit organizations should also consider D&O insurance.