What is directors and officers (A&O) liability insurance?
Directors and Officers Liability Insurance (D&O) is insurance coverage intended to protect people against personal loss if they are sued because of their tenure as a director or officer of a company or another. type of organization. It may also cover legal fees and other costs that the organization may incur as a result of such a lawsuit.
Key points to remember
- Directors and Officers Liability Insurance (D&O) covers directors and officers or their business or organization in the event of a lawsuit.
- D&O insurance claims are paid to cover losses associated with the lawsuit, including legal defense costs.
- Most policies exclude fraud and criminal offenses.
- Side A coverage covers directors and officers for claims for which the company refuses or is financially unable to pay compensation.
- Side B coverage covers directors ‘and officers’ losses when the company awards compensation.
- Side cover C, also known as “entity cover”, extends coverage to the legal person itself.
- The average annual cost of a blanket worth $ 1,000,000 is typically between $ 5,000 and $ 10,000.
- All other things being equal, companies with a long history of operation and a strong financial position pay less for D&O insurance than younger, heavily indebted companies.
Understanding Directors and Officers Liability Insurance (A&O)
D&O insurance applies to anyone who is a director or officer of a for-profit business or a non-profit organization. A D&O insurance policy insures against personal loss, and it can also help reimburse a business or non-profit organization for legal fees or other costs incurred in defending such people against legal action.
D&O insurance claims are paid to the directors and officers of a business or organization for losses or reimbursement of defense costs if legal action is brought against them. Such coverage may also extend to criminal and regulatory investigations or to trial defense costs. Civil and criminal actions are often brought simultaneously against directors and officers.
D&O insurance is akin to corporate governance, company law and fiduciary duty to stakeholders, such as shareholders and beneficiaries. US federal law gives directors and officers broad discretion in their business activities. Company law is generally dealt with at the state level. Listed companies are subject to more federal regulation than private companies, especially under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Types of directors ‘and officers’ liability insurance (D&O)
The typical D&O insurance policy contains three types of insurance agreements. They are commonly referred to as A-side, B-side and C-side.
Side A coverage covers directors and officers for claims for which the company refuses or is financially unable to pay compensation. This can happen, for example, if the company has declared bankruptcy. Under side A coverage, the individual agent is the one who is insured and it is their personal property that is at risk.
Side B coverage covers directors ‘and officers’ losses when the company awards compensation. In this case, the police will reimburse the company for legal costs. Under side B coverage, it is the company that is insured while its social assets are threatened.
Side cover C, also known as “entity cover”, extends coverage to the legal person itself. Under side cover C, the company is insured and its social assets are at risk.
The exact coverage of a business ultimately depends on the unique characteristics of its business model, needs, history and financial standing.
Directors and Officers Liability Insurance Process (D&O)
The process for D&O insurance in real life is simple. It all starts when a manager does not fulfill his role. Some common risk scenarios include professional misconduct, reporting errors, inaccurate disclosures, insolvencies, and regulatory violations. As a result, several applicants decide to sue the manager.
Once the manager and legal / risk management are informed of the loss, they then provide a description of the loss to their broker / insurer. If the claim is covered, the insurer covers the defense costs. If the claim is covered and the case is lost, the insurer covers the defense costs and financial losses.
Of course, this example is highly dependent on the terms and conditions of the specific policy.
Management liability insurance
A&D insurance has become closely associated with the broader management liability insurance, which covers the responsibilities of the company, as well as the personal responsibilities of directors and officers of the company.
D&O policies can take different forms, depending on the nature of the organization and the risks it faces. It is best to seek out an insurance company with extensive experience in this specialized area. Policies are generally written by the organization to cover a group of individuals rather than by the individuals themselves.
If a business fails to disclose important information or willfully provides inaccurate information, the insurer may avoid payment due to misrepresentation.
The “severability clause” in the policy conditions may be intended to protect against this by preventing fault by one insured from affecting the insurance of other insureds; however, in some jurisdictions it may be ineffective.
Policies can be written to insure against a variety of risks, but they generally exclude fraud, criminal activity, and illegal profit. In addition, most policies contain “insured versus insured” clauses, whereby no claims are paid when current or former directors and officers sue the company. This prevents the company from profiting from the deception or conspiracy.
D + O Insurance FAQs
Do i need D + O insurance?
It depends on the size and nature of your business. But generally speaking, D&O insurance should be seriously considered.
In fact, a 2016 Chubb study showed that over 25% of private companies reported a D&O loss over a three-year period.
In particular, 96% of these companies were negatively impacted financially. For businesses that did not purchase D&O insurance, the average loss was $ 390,000. In addition, businesses of all sizes and in all industries have suffered losses from D&O, including healthcare companies, manufacturers, retailers and many more.
So while D&O insurance is not necessary for every business, in all situations it is fair to say that any business with a board of directors would be wise to purchase D&O insurance.
Do Small Businesses Need D + O Insurance?
Small businesses are not immune from costly lawsuits. It can be easy to assume that lawsuits and fines are only triggered by disgruntled shareholders. This is certainly the case with the high-profile lawsuits against large state-owned companies.
However, Chubb data shows that for private companies, the most damaging lawsuits are brought by customers, suppliers and other third parties.
Here are some of the top reasons why businesses don’t buy D&O insurance:
- The belief that it is not necessary because their business is a private enterprise
- They haven’t known a costume in the past
- The belief that it is not necessary because their business is family-owned
Small businesses are particularly vulnerable to a potentially damaging lawsuit because they lack the financial strength that large businesses can have.
How much does D + O insurance cost?
The cost of D&O insurance can vary widely depending on factors such as company size, industry, risk appetite, financial condition, income and loss history.
All other things being equal, companies with a long history of operation are likely to pay less than younger organizations. In addition, companies with a strong financial position (lower risk of bankruptcy) will also pay less, in general.
That being said, the average annual cost of a blanket worth $ 1,000,000 is typically between $ 5,000 and $ 10,000.
What type of D + O insurance should I buy?
Again, the type of D&O insurance you choose depends on the needs of your business and what it can afford. Here are some main things to consider:
- Should the policy cover only managers (side A) or the company as a whole (side B and side C)?
- What coverage is sufficient?
- What are the biggest D&O risks your business, in particular, faces?
It is also important to identify whether the D&O policy you are purchasing is a “duty to indemnify” or a “duty to defend” policy.
As part of an indemnity policy, the company can choose its own legal defense team. The insurer will then reimburse the company for defense costs as long as it deems the price “reasonable”. On the other hand, the insurer is responsible for defending the business by virtue of an obligation to defend the police.
Generally speaking, a duty to defend policy is preferable for small businesses because the process is streamlined, hassle-free and all defense costs are covered.
What does D + O insurance cover?
D&O insurance generally covers legal fees, settlements and financial losses when the insured is held liable. Common allegations covered include breach of fiduciary duty, non-compliance with regulations, lack of corporate governance, creditors’ claims and reporting errors.
Plain and simple fraud, criminal activity and lawsuits between executives of the same company are generally not covered.