D&O Liability: Do You Need to Insure?

d&o liability, H&K Insurance Agency, Watertown, MA

Liability to your company can come in many forms. Most target the company as a whole, such as property liability, or to all employees in general such as with Employment Practices Liability Insurance. But others target keystone employees, particularly in management positions. As a big company with accountability to shareholders, investors, and creditors, alongside their employees and customers, certain principle members known as directors and officers (D&O) can and will be accountable for company management.

Defining D&O Liability Insurance

Directors and Officers Liability Insurance (D&O Liability Insurance) covers reimbursement and advancement of legal costs due to legal action brought against these key members in their capacity as directors and officers. The reimbursement may be payable to the directors and officers themselves, or to the company as a whole. In particular D&O insurance can cover many scenarios, including:

  • Unlawful Acts
  • Erroneous Investment Decisions
  • Conflicts of Interest
  • Failure to Maintain Property/Assets
  • Releasing Confidential Information
  • Hiring and Firing Decisions
  • Gross Negligence
  • Other Various Errors or Omissions

Types of Coverage and Exclusions

There are different types of coverage, as well as common exclusions. These include including a lack of coverage for fraud or other criminal acts, but a common compromise is a “segregate clause,” where coverage for the company and innocent parties is maintained, even when dragged into a lawsuit due to criminal actions of another director or officer. Exact coverage is broken up into three general types:

Coverage A

This covers individual directors and officers with personal coverage on past, present, and future D&Os. It provides funds and reimbursement to the directors and officers when legally defending against allegations and personal liabilities or acts.

Coverage B

This coverage provides corporate coverage for the company to indemnify their D&Os, but does not provide them with liability coverage of their own. The company receives the compensation from the claim, and then reimburses it to the directors and officers as needed.

Coverage C

This is a blanket coverage for both the company and its D&Os. The coverage provides protection to the company for its own liabilities, as well as the D&Os. These policies can include clauses for allocations agreements for all parties, as well as defaults and enforcement for parties to accept arbitration.

An Example of D&O Liability

For an example on how D&O insurance comes into play, imagine a board of directors of a publicly traded company. Due to their actions (or inactions) there has been a massive loss for the company. They are held responsible by the shareholders, and those shareholders file a lawsuit against the directors and the company. Directors’ and officers’ liabilities insurance will cover the cost of the lawsuit, both for the company and the individual directors.

We hoped this shed some light on this type of specialized liability insurance. Does your company have it? Does it need it? Please contact H&K Insurance and we’ll work with you to make sure your growing business has the type of coverage it needs, from property to cyber insurance, and everything in between.