Directors and Officers (D&O) liability insurance is a type of insurance that protects the directors and officers of a company from financial losses if they are sued for actions taken within their managerial roles. Here’s how it works and why it’s important:
Who Can Be Sued?
- Directors: Members of the Board of Directors who oversee corporate strategy and governance.
- Officers: High-level executives (CEO, CFO, etc.) who manage day-to-day operations.
- In some cases, coverage extends to managers and even general employees.
What D&O Insurance Covers
- Lawsuits and Defense Costs: If directors or officers are sued, D&O insurance covers:
- Legal defense costs (attorney fees, court costs)
- Settlements or judgments against them (up to policy limits)
Common Reasons for Lawsuits:
- Breach of Fiduciary Duty: Accusations of not making decisions in the company’s best interest.
- Misrepresentation in Financial Statements: Investors claiming losses due to inaccurate information.
- Regulatory Violations: Lawsuits by government agencies over compliance failures.
- Employment Practices: Discrimination or wrongful termination claims by employees.
- Other Alleged Wrongful Acts: Can encompass a wide range of management decisions.
Why Companies Need This Coverage:
- Personal Assets at Risk: Lawsuits against directors and officers can target their personal assets, not just the company’s. D&O insurance shields their finances.
- Protects the Company: D&O insurance can sometimes cover costs the company incurs due to defending or indemnifying its leadership team.
- Attracting and Retaining Talent: Top executives are more likely to join a company with D&O protection.
- Increasingly Necessary: As lawsuits and regulatory scrutiny increase, D&O insurance has become essential in many industries.
Important Notes:
- D&O doesn’t cover intentional fraud or criminal acts.
- Policies have exclusions and may not cover all types of claims.