Who Needs It?
The directors and officers of a corporation or other business entity, whether publicly traded or privately held, hold highly visible positions of great fiduciary responsibility. Increasingly, courts are holding such people personally liable for abuse of authority, libel, slander, financial mismanagement, and other acts in suits brought by shareholders, creditors, customers or employees.
Directors & Officers (D&O) Liability Insurance covers the litigation costs and damages resulting from such lawsuits. Generally designed to help protect both the assets of the company and the personal assets of the individual, D&O Insurance normally covers liabilities that arise when individual or group acts in the capacity of a director or an officer of the firm.
What It Isn’t
D&O Insurance is not designed to cover small exposures. In most cases, a D&O policy’s deductible is sufficiently large that invoking the policy only makes sense when the firm is faced with allegations of fraud, fiduciary misconduct, and other serious wrongdoing.
Who Should Have It?
If you’re sitting on a board, whether profit or non-profit, insist on D&O coverage. Those involved with non-profits are more at risk, because unlike non-profits, most corporations can indemnify their directors and officers to a certain degree. Charitable organizations don’t usually have the funds to provide a defense or to pay settlements that may arise from a suit.
The business itself gains a benefit by offering D&O insurance. Beyond protecting against many lawsuits, quality D&O insurance speaks volumes about a business’ credibility and integrity, and can help attract and retain high-quality directors and officers.
Things To Think About
Has your company ever been sued by shareholders? Has your Board ever made some unpopular decisions? Has your Board ever had problems with outside contractors or vendors?
Depending on deductibles and other variables, D&O insurance can cost roughly $60 to $100 per employee per year. A typical deductible is $5,000. Many companies prefer a higher deductible—and a lower premium—choosing only to invoke the policy in the face of a major lawsuit.
As with any other insurance product, higher coverage limits and an active claims history will result in a higher premium.