Directors and Officers Liability Insurance: What Is D&O Coverage?
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What is directors and officers (D&O) insurance?
Directors and officers insurance, also called D&O liability insurance, is insurance that protects a company’s leaders from personal financial losses if they are sued in business-related lawsuits. D&O insurance covers claims against them while they're sitting on the board of directors or acting as officers of the company.
Leaders can be held responsible for business failures and potentially implicated in claims against the company. Not every company needs to purchase this type of business insurance policy, but it can allow officers to confidently lead without worrying about personal monetary losses.
Do small businesses need D&O insurance?
Directors and officers insurance is generally worth purchasing if your company:
Is publicly traded. Shareholders can sue directors and officers if they are disappointed in stock performance. Because of this, public businesses are more likely than private businesses to purchase directors and officers insurance.
Has a board of directors. Individuals may not want to serve on the board if they're not protected from lawsuits.
Has private equity investors. Venture capital and other private equity firms may require coverage.
Is recruiting top talent for executive-level positions. This protection could make the company's job offers for executive roles more competitive.
Includes indemnity provisions in employment contracts for executives. Indemnity provisions ensure that a company — not an individual executive — is responsible for legal expenses if an executive is sued for business-related matters. If indemnity provisions are included in executive employment contracts, directors and officers insurance will protect the business from a major financial hit in the event of a lawsuit.
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What does directors and officers insurance cover?
There are three types of directors and officers insurance, referred to as sides:
Side A: Covers company directors and officers when the company can’t reimburse them.
Side B: Reimburses the company after it compensates a director/officer for loss.
Side C: Provides direct coverage of the business when both the business and its directors and officers are named in a securities lawsuit.
There are different types of policies; select coverage based on how your business is organized and what risks you're exposed to.
Some risks you may want to cover include:
Employment lawsuits. An employee might feel they've been treated unfairly and could implicate an officer of the company.
Creditor, investor or shareholder lawsuits. A creditor could sue the directors of a company after it fails to repay a loan. Or, an investor or shareholder could bring a lawsuit because of poor company performance.
Legal mistakes and failures. A business could fail to follow pollution regulations, resulting in a lawsuit, for example.
Client data breaches. After a business experiences a cyber attack, a client who was harmed could decide to sue the business and its officers.
What does directors and officers insurance not cover?
Here are some standard exclusions you can expect to see in directors and officers insurance policies:
Fraud and criminal offenses. An executive will not be covered if they steal money from the company or are arrested for driving under the influence, for example.
Pending and prior litigation. Cases that are in progress or happen before the policy begins are not generally covered.
Bodily injury/property damage. Customer injuries or property damage would typically fall under a general liability insurance policy.
Insured-versus-insured claims. One director or officer suing another is not covered.
Employee Retirement Income Security Act claims. Claims of mismanagement of employee benefit plans would typically be covered by fiduciary liability insurance.
How much does D&O insurance cost?
Premium amounts vary. However, a survey by the insurance marketplace Insureon found that 54% of its small-business customers paid less than $1,500 per year for directors and officers insurance. The amount you pay depends on the coverage limit you select and several other factors. Generally, a higher risk factor means an increased premium. The following are some common factors an insurer would use to assess risk:
Company size and number of employees. A large company with many employees would generally carry more risk than a small company.
Industry and operating costs. The investment banking and securities industry exposes its leadership to more risk than other industries, for example.
Years in business and management experience. A new business with inexperienced managers can be riskier to underwrite.
Business ownership structure. Publicly owned companies are often considered a higher risk than private companies.
Company’s financial security. A company with unstable finances might become insolvent during a lawsuit and pose a higher risk.
Claims history. Insurers review a company’s history to look for previous lawsuits.
It’s important to shop around before you purchase a policy. You’ll have a better sense of what premium is reasonable for your business if you get at least three different price quotes and compare options.
What's self-insured retention?
Self-insured retention is the dollar amount you'll be required to pay on each claim before the insurer will start covering costs. You may see this rate listed on the declaration page of your policy. You can think of it as a type of deductible. A low-risk company might have a retention of $1,000 while a high-risk company might have a retention of $250,000.
A retention can also be used as a cost-control tool. As a retention goes up, your premium goes down. That’s because you are taking on some of the risk that would otherwise be shouldered by the insurance company. Also, every claim costs an insurance company time and money. When a business handles small claims itself, it lowers the expense for the insurance company.
» MORE: How to get business insurance
Where can I buy directors and officers insurance?
Many insurers offer directors and officers policies. They can be purchased individually or bundled with other types of business insurance.
According to S&P Global Market Intelligence, the largest insurance providers by direct premiums for this type of policy in 2020 were:
Axa S.A.
American International Group Inc.
Other popular carriers include:
Nationwide (policies for public companies not offered).
If you currently have business insurance, your first step may be to contact your agent to see if they offer directors and officers policies. You can also request a quote online directly from an insurance carrier, or work with an insurance broker.
It’s best to work with a knowledgeable insurance professional who can explain the finer details of the policy. You may also want to consider having an attorney or insurance consultant who has no financial interest in the transaction review the policy before you buy it.
