What You Need to Know About Directors and Officers Liability Coverage
The bottom line is that if your organization operates in an industry where it could be accused of financial mismanagement, you almost certainly will benefit from the protection provided by directors and officers and liability coverage.
But, how does D&O coverage work, and how much could you expect to pay? I’ll outline what you need to know to make a more informed decision.
The Basics About Directors and Officers Liability Coverage
Directors and officers insurance, also commonly referred to as professional liability, malpractice, and management liability insurance, covers financial losses caused from wrongful, negligent acts, or omissions or misleading statements—including defense, investigation, and extradition costs and expenses—committed by your company’s directors and officers.
In most instances, IHS Insurance Group can write D&O coverage for for-profit and not-for-profit businesses, privately held firms, and educational institutions.
In layperson’s terms, D&O coverage helps protect a company’s executive team, as well as their spouses, from personal liability related to their management decisions.
Examples include lawsuits related to:
- Unfair business and employment practices
- Negligent acts, or lack of corporate governance
- Investment decisions
- Misrepresentations of company assets
- Mismanagement or misuses of company funds, or other examples of fiduciary duty breaches
- Conflicts of interest
- The release of non-public information
- Failure to comply with workplace laws
These lawsuits can be brought by a wide variety of parties, including employees, investors, customers, vendors, and even competitors, and often seek to expose directors’ and officers’ personal assets as compensation when financial expectations aren’t met.
Pro tip: Directors and officers liability insurance works for public and private companies and nonprofit organizations, although some meaningful differences fall outside the scope of this article. Contact IHS Insurance Group today if you have additional questions (more soon)!
What are the Different Parts of Directors and Officers Insurance?
Together, there are three different ‘sides,’ formally known as insuring agreements, that constitute a directors and officers insurance policy:
- Side A – If the company won’t or can’t indemnify the directors or officers (e.g., bankruptcy), this part provides coverage.
- Side B – Reimburses companies for defense and other related costs who choose to indemnify their directors and officers.
- Side C – If the company itself (versus a specific individual, in their role as a director or officer) is litigated against, this section of the policy provides coverage.
With this said, will you encounter any circumstances where directors and officers insurance does not provide coverage?
Are There Common Directors and Officers Insurance Exclusions?
Like many other commercial insurance types, directors and offers policies can be specifically tailored to the risks they’re insuring. As such, exclusions can be very different between carriers and individual exposures.
IHS Pro Tip: Therefore, make sure that you speak with your broker and the company directly so that you can negotiate exclusions, depending on your unique risks that require coverage.
With these details in mind, D&O insurance typically doesn’t provide coverage for lawsuits between individual directors and officers within the company nor fraudulent acts. Often, companies pay for the latter’s costs upfront but require repayment if their client is judged guilty in court.
Directors and Officers Coverage vs. Employment Practices Liability and Errors & Omissions Insurance
We’ve learned that Directors and Officers coverage is written to protect a company’s management from the business decisions.
On the other hand, Errors and Omissions insurance—also commonly referred to as professional liability insurance—protects a business when it provides services that cause financial or other harm. Or when the company fails to deliver agreed-upon services altogether.
Comparatively, Employment Practices Liability Insurance (EPLI) covers internal claims related to wrongful termination, invasion of privacy, retaliation, discrimination, sexual harassment, and emotional distress.
Here’s a quick table outlining the differences:
|Directors and Officers (D&O)||Errors and Omissions (E&O)||Employment Practices Liability (EPLI)|
|Protects a business’s management from related decisions and actions.
Ex: A company’s CEO is sued for slandering a competitor.
|When a company’s business decisions cause harm or when services aren’t delivered.
Ex: A Realtor fails to disclose a home’s foundation issues, resulting in a buyer’s financial loss.
|Works to protect a company against claims brought forth by its employees.
Ex: Wrongful termination, invasion of privacy, retaliation, discrimination, sexual harassment, and emotional distress.
How Much Does Directors and Officers Liability Insurance Cost?
Directors and Officers insurance is typically tailored to the risk insured, so average costs are challenging to come by. And like most other forms of insurance, what you pay also depends on typical factors like:
- Coverage limits, endorsements, and deductibles
- Assets and debt
- Legal history, including other insurance claims
- Length of time in business (typically, long-term companies will pay less than newly-formed)
- Number of shareholders
- Financial stability (i.e., risk of bankruptcy)
With all of these details in mind, businesses might expect to pay between $3,000 and $40,000+ per year for Directors and Officers coverage.
What’s Next? Rely on the Directors and Officers Professionals at IHS Insurance Group
When you’re ready, you must work with an agent who has experience with Directors and Officers coverage, including the ability to respond to your questions and concerns quickly.
The IHS Insurance Group team has decades of combined experience helping clients like you, so make sure you reach out now!
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We look forward to speaking with you today!