Directors and Officers (D&O) Liability Insurance: The Complete Guide

As your business grows, it’s likely that you’ll want to expand your current team. You might want to hire officers to fill management seats, and if you have a corporation, your board of directors will exert influence on the direction of your business.

Anyone who serves as an officer or director of a company exposes themselves to potential liability. Customers, employees, vendors, or competitors can personally sue directors and officers for alleged or actual errors in managing the company. Having adequate small business insurance can help you and your team avoid the costs associated with such lawsuits. 

Directors and officers (D&O) insurance, also called management liability insurance, protects officers and directors from personal losses if they are sued, and covers the organization if the company incurs legal costs as a result of the lawsuit. We’ll explain more about what D&O insurance covers, what it costs, and the best places to buy this insurance.

Do You Need Directors and Officers Liability Insurance?

Your company should consider purchasing D&O insurance if you employ officers or have a board of directors. Although the main purpose of a D&O policy is to protect directors and officers from personal losses, the policy also reimburses the business for any legal costs incurred in defending those individuals.

According to a survey by the insurance company Chubb, more than one-quarter of companies have experienced D&O losses during the previous three years, and the average D&O lawsuit costs between $35,000 to $100,000 to resolve.[1][2] Despite that, more than half of companies don’t have adequate D&O insurance. 

D&O insurance might be required in certain situations. For example, if you’re raising money for a startup, it’s likely that your investors will expect you to carry D&O insurance. Having this coverage will protect the investor if they become a board member. 

Many small business owners assume that D&O insurance is designed only for Fortune 500 companies, but even small firms need it. In particular, if your business regularly interacts with customers, utilizes the services of vendors, or seeks funding from investors, then your business has more exposure to potential lawsuits and could benefit from D&O coverage. If you have shareholders or belong to an industry that’s subject to government regulation, those factors present additional risks that you can protect against with D&O insurance.

Another common misconception is that general liability insurance, which usually comes packaged with a business owners policy, will cover claims against directors or officers. This generally isn’t true. A general liability policy covers basic claims of bodily injury or property damage against your business, such as a slip and fall at your shop. However, a general liability policy won’t cover claims against directors or officers for mishandling company matters. For that, you need D&O insurance.

directors and officers insurance

What Directors and Officers Insurance Covers

D&O insurance covers lawsuits brought against directors or officers for their role in the company. The business lawsuit might be brought by employees, vendors, competitors, investors, shareholders, or government agencies. 

The following types of claims are covered by directors and officers liability insurance:

  • Employment-related lawsuits and unlawful termination claims
  • Shareholder lawsuits
  • Government lawsuits for failure to comply with regulations or laws
  • Creditor lawsuits 
  • Competitor lawsuits, such as breach of copyright or slander
  • Breach of fiduciary duty
  • Misrepresentation in public filings or documents
  • Inadequate or inaccurate disclosure
  • Reporting errors

You might be surprised to learn that the most common source of D&O claims are from your own employees. Employees might sue directors and officers for discrimination, harassment, wage and hour violations, and wrongful termination. Employment practices liability insurance provides the broadest company-wide protection for these types of clams, but D&O insurance protects the directors and officers individually.

Aside from employee claims, there is a diverse set of claims that D&O insurance covers. For example, an officer might misunderstand a government regulation, which could trigger a lawsuit from a government agency. A competitor might sue a director for breach of intellectual property

Publicly traded companies face the added risk of shareholder lawsuits. Such lawsuits have been on the rise over the last several years and are particularly common when stock value decreases or when a company acts negligently.[3] For instance, following the 2018 California wildfires, shareholders sued Pacific Gas & Electric (PG&E) after reports surfaced that the utility company was partially responsible for the fires.[4]

Structure of a D&O Insurance Policy

Coverage will vary based on your policy, and it’s important to read the fine print. However, there are typically three coverage parts, or “sides,” in a D&O insurance policy:

  • Side A: Protects the personal assets of directors and officers (and their spouses) and pays for their legal defense costs in the event that the company can’t indemnify them (because it filed bankruptcy, for example).
  • Side B: When the company can indemnify directors and officers, the insurer will reimburse the company for its losses. If a director or officer is sued, your company is obligated to make a good faith effort to indemnify their losses.
  • Side C: Provides legal protection for a company that’s named in a shareholder lawsuit along with directors or officers. This coverage is generally reserved for publicly traded companies.

When purchasing a D&O policy, you’re typically able to adapt the amount of coverage for each Side. For instance, a smaller business is more at risk of going bankrupt, so it might benefit from more Side A coverage. 

Daniel Struck, a partner at the law firm Culhane Meadows, says that D&O coverage can be adapted to a business’s specific needs. “An insured [company]  should be attuned to its particular risks and seek amendments that respond to its needs,” says Struck. “For example, a business in a highly regulated industry is likely to have a greater need for a D&O policy that defines claims to include government investigations and inquiries than other businesses.”

What’s Excluded From Directors and Officers Insurance Coverage?

In most cases, directors and officers are the focus of D&O policies, though a few policies extend coverage to rank-and-file employees. Don’t assume that your employees are covered without reading the fine print of the policy. These are some types of claims that are normally excluded from D&O insurance coverage:

  • Fraud
  • Intentional misconduct
  • Property damage and bodily harm claims
  • Fines or penalties (as opposed to lawsuits) from a government agency, such as IRS-assessed penalties
  • Professional errors or malpractice claims, which is also covered by professional liability insurance
  • Actions of directors or officers that are unrelated to their roles at the company 

In addition to these exclusions, every D&O policy will have a policy period during which claims are covered. Most policies will exclude coverage for lawsuits that have already started before the policy was purchased. In addition, D&O policies are designed to protect directors and officers who have positive intentions towards the company. Therefore, intentional fraud or misconduct will be excluded from coverage.

Make sure you read the fine print of your policy before purchase to know exactly what’s covered and what’s excluded. According to Struck, “Seemingly small differences in policy language can make a significant difference in the scope of D&O coverage. For example, employees may be covered to the extent that they are acting in their capacity as an employee, to the extent that they are acting at the direction of the company, or if a claim is also brought against the company. It is not unusual for issues to arise around the question of whether employees were acting within or outside their insured capacities.”  

directors and officers insurance

Cost of Directors and Officers Insurance

According to insurance marketplace Insureon, directors and officers liability insurance can cost as little as $500 per year for $1 million in coverage, and the cost can go up to as much as $10,000 per year. 

The cost of D&O insurance will vary based on several factors, including:

  • The company size
  • Number of employees
  • The nature and scope of the company’s relationships with vendors, investors, and other third parties
  • Business operating costs
  • Business revenue

directors and officers insurance

Litigation trends can also affect the cost of directors and officers insurance. For example, shareholders filed a record number of securities lawsuits in 2017 and 2018, which triggered a slight increase in D&O premiums.[5] 

Where to Buy Directors and Officers Insurance

The market for directors and officers insurance has evolved over the last several years, with a rise in employee and shareholder lawsuits. However, the key insurance carriers in this space have remained the same for several years. We recommend buying business insurance from a carrier that is A-rated or higher by the AM Best Company. AM Best is a credit rating agency that ranks insurance companies based on their financial stability.

Based on a review of different providers, here are the best places for small business owners to buy directors and officers insurance:

American International Group (AIG)

AIG is the largest global provider of directors and officers insurance, and has over 40 years of experience in underwriting this type of coverage. An A-rated insurer, they provide a variety of D&O products with Side A, B, and C coverage. Their Side A Select product offers extended protection. It covers attorney fees and guarantees an independent defense lawyer for the director or officer who is sued. Civil fines and penalties are also covered, something that’s typically excluded in D&O policies. The only downside to working with AIG is that they are accustomed to serving larger businesses that need high coverage limits. Get started by filling out AIG’s contact form, and a rep will get back to you.

Chubb 

Another carrier to consider for D&O insurance is Chubb. They have an A++ rating from AM Best, which is the highest financial strength rating that an insurance company can have. The advantage of buying D&O coverage from Chubb is that they will focus on protecting your company, directors, and officers against local risks. Chubb’s D&O policy forms differ from state to state and locality to locality to take account of local laws and regulations. That means you’ll be covered if, for example, a local regulator sues your officer or director. At the same time, Chubb can sell you an integrated policy if you operate in multiple places. To get started, find a business insurance agent.

Alliance Marketing and Insurance Services (AMIS)

Business owners who want to bundle D&O insurance with other types of business insurance should consider AMIS. AMIS has a package policy called Private Accord that brings together D&O coverage, EPLI coverage, and fiduciary liability insurance (FLI) into one policy. These are all important insurance policies that can protect your company and your team. You also have the option to add on commercial crime insurance. Bundling coverage offers an economical solution for small businesses that need to buy insurance, and also eliminates coverage disputes among multiple carriers. To start, visit AMIS’s website and complete an application for the package policy.

Founder Shield

Founder Shield is a good option to try for high-growth startups. Startups often need D&O insurance because they’re going through a round of funding. Investors will want you to have D&O coverage to ensure that you won’t be bankrupted by a lawsuit. And if a venture capital firm is putting someone on your board, then they will want to make sure their employee is protected by D&O insurance coverage. Founder Shield is not an insurance company itself. They are a data-driven insurance marketplace that will help your business shop around for D&O insurance. They will place you into an affordable, comprehensive coverage for your company. Get a free online quote to start.

Insureon

Similar to Founder Shield, Insureon is an insurance marketplace that helps you shop around for business insurance. It takes just a few minutes to fill out Insureon’s online questionnaire and get a custom quote for D&O insurance from multiple providers. You can adjust your Side A and Side B coverages based on your business’s needs and budget. If you need help comparing providers or policies, Insureon’s representatives are licensed insurance agents and available to walk you through your options on the phone. Insureon also can help non-profit organizations buy D&O insurance.

Directors and Officers Insurance: The Bottom Line

The best way to attract top talent for your board seats and management positions is to have D&O insurance. This insurance protects the personal assets of directors and officers, and it also covers your company. Coupled with other essential insurance policies, such as EPLI coverage and professional liability coverage, D&O insurance makes sure that your company will be secure even if it gets hit with an unexpected lawsuit. 

Article Sources:

  1. Chubb.com. “Top Risks for Companies in the U.S.
  2. InsuranceJournal.com. “Nonprofits Especially Need Protection Against D&O Liability Risks
  3. WSJ.com. “Companies Face Record Number of Shareholders Lawsuits
  4. Reuters.com. “California Wildfire Victims Sue Utility PG&E Alleging Negligence
  5. Stanford.edu. “Securities Class Action Clearinghouse
Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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