DIRECTORS & OFFICERS INSURANCE
Covers directors and officers or their company or organization if sued
What Is Directors & Officers Insurance?
Directors and officers liability insurance, also referred to as D&O Insurance, is an insurance coverage aimed to protect directors, officers, and their spouses in case they are sued as a result of serving as a director or an officer of a business for actual or alleged wrongful acts managing a business.
The insurance is designed to cover the fines, penalties, judgments, and settlements. It can also cover the legal expenses and other costs the organization may incur due to such a lawsuit.
Some of the most common lawsuits that D&O insurance can protect against are related to misuses of company funds, misrepresentations of company assets, breach of fiduciary duty, failure to comply with workplace laws, and a lack of corporate governance.
What Does D&O Insurance Cover?
The D&O insurance coverage that a business purchase varies and depends on each business’s characteristics and needs. The policy commonly covers legal fees, settlements, and financial losses when the insured is held liable. Common allegations covered include breaches of fiduciary duty, failure to comply with regulations, lack of corporate governance, and reporting errors.
A typical D&O insurance policy designed for a privately held business may include three types of coverage:
A-side coverage. This part covers directors, officers, and sometimes employees for defense costs, settlement fees, or judgments if the company cannot repay them, such as declaring bankruptcy.
B-side coverage. This covers the company for directors', officers', and employees' losses when indemnifies them.
C-side coverage. Also called “entity coverage,” this financially protects the corporation in its own right. Entity coverage may reduce the limits available to protect the individual officers and directors.
What is NOT Covered?
Any criminal activity by the director or officer is usually not covered. Another area of D&O insurance is the question of what type of behavior the policy does not cover. When it comes to D&O insurance exclusions, they are usually negotiable and vary from policy to policy according to the company’s needs.
Lawsuits between directors and officers within the company are typically not covered; this prevents collusion against the insurance company. In addition, if a director or officer is accused of fraudulent acts, defense costs are provided until final judgment proving guilt. If the executive is found guilty of fraud, they would be required to repay all defense costs.
Who Needs D&O Insurance?
Any private or public company and non-profit organization with a board of directors or advisory committee could be accused of financial mismanagement and consider D&O insurance.
For instance, if your business owes money to a creditor, D&O insurance will help protect the management team if the company will not be able to pay its debt, and the creditor will claim the directors and officers of the company are to blame and will file a lawsuit.
Another reason a company purchases D&O insurance is that high-quality executives will usually demand a D&O cover as a basic condition for their employment.
Sometimes, small businesses and startups are accountable for their business activities by their commercial contracts with other companies. The average loss for these cases is approximately $400,000.
The exposures that directors and officers are most vulnerable to include regulatory actions, misrepresentation allegations, securities litigation, and breaches of fiduciary duties.
How Much Does D&O Insurance Cost?
The average yearly cost of each $1,000,000 worth of coverage is $6,500.
The factors affecting the cost of D&O insurance are industry, company size, revenue, assets and outstanding debts, shareholders headcount, and claims history. The number of years in business may also affect the price as D&O insurance for businesses with a long operating history will likely cost less than younger ones. Also, companies with a solid financial position (lower bankruptcy risk) will usually get a lower price for their policy.
HOW TO BUY DIRECTORS & OFFICERS INSURANCE
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What Type of D&O Insurance Should I Buy?
The standard D&O insurance policy contains three types of insuring agreements, referred to as Side A, Side B, and Side C.
Side A coverage covers directors and officers for claims where the company refuses to or is financially unable to pay for indemnification. This can occur, for example, if the company has declared bankruptcy. Under Side A coverage, the individual officer is the one who's insured, and it's their assets that are at risk.
Side B coverage covers the losses of directors and officers when the company does grant indemnification. In this case, the policy will reimburse the company for legal costs. Under Side B coverage, the company is insured while its corporate assets are at risk.
Side C coverage, also called "entity coverage," extends coverage for the corporate entity itself. Under Side C coverage, the company is insured, and its corporate assets are at risk.
The exact coverage that a company goes with ultimately depends on its unique business model characteristics, needs, history, and financial picture.