Most large, public companies have Directors and Officers (“D&O”) insurance, to provide protection for the board of directors, and for key officers, in the event one of those people is sued in their individual capacity when acting for the company.
D&O insurance is not just for public companies, nor is it just for large companies. Small and medium-sized companies do not have shareholders and are not subject to securities class-action lawsuits. However, claims can come from anywhere, including customers, vendors, competitors, employees and even government agencies. D&O is designed to cover claims against directors and officers, and sometimes also includes coverage for the company itself.
Why should companies consider D&O coverage?
Some of the types of claims commonly covered by D&O insurance include claims related to:
- Breach of fiduciary duty
- Misuse of company funds
- Failure to comply with laws
- Theft of intellectual property
- Lack of corporate governance
- Bankruptcy of the company
Without adequate D&O coverage, directors and officers can be held personally and financially liable for judgments or settlements, litigation costs, for lawsuits filed against them in their capacity as directors or officers of the organization. General liability or “umbrella” policies generally do not cover management liability lawsuits.
Just because a lawsuit or other claim is filed, does not mean there is any truth to the allegation, of course. However, even when a claim against an officer or director is completely without merit, it still needs to be defended.
In many small businesses, directors and officers have much of their own personal wealth in the business, so defending or settling a claim can have repercussions for the director or officer, and his or her family/estate. D&O insurance provides coverage for these types of costs, giving directors, officers and the company some extra peace of mind.
While D&O can be purchased as a stand-alone policy, for smaller companies, it may be more cost-effective to bundle it together with Employment Practices Liability insurance, to cover employee-related claims such as discrimination, sexual harassment, or wrongful termination.
What does D&O coverage cost?
The cost for D&O coverage will depend on many factors, including the type of business, its revenues, its debts, and whether prior legal claims have been filed against the company, or against its officers and directors in their capacity as such for the company.
When it comes to providing protection for employment-related claims, insurers will also want to know whether the company has up-to-date employee policy manuals, and whether those policies have been provided to all employees.
Can a company go without D&O coverage?
If a company has adequate funds set aside to essentially “self-insure” against claims, and if all employees are also officers and directors, the company may consider going without D&O coverage for a time.
However, purchasing D&O coverage is advisable for just about every company, so it should be added as soon as it is financially feasible for the company to do so.
What actions should business owners take?
Consult with an attorney to review:
- Whether the company’s bylaws and articles of incorporation/organization provide the maximum indemnification under current state law (adjust as recommended by your attorney)
- Whether state laws in the state of incorporation/organization are favorable to directors and officers.
Talk to your insurance professional to discuss:
- Recommended coverage amounts
- How coverage can be shared between directors, officers and the company itself
- The different coverage levels offered by different policies, and when the insurer is not obligated to provide coverage. It is important to explore how much coverage is provided for litigation defense costs, as that is often an important reason for purchasing D&O insurance.
To learn more, and to explore whether D&O insurance makes sense for your business, contact us today.