Company leaders face plenty of responsibility as they head up an organization. Turning a profit while balancing risk and opportunity can keep things stressful.
Added to those challenges is the threat of legal action. Directors and officers (D&O) liability insurance is designed to protect organizational leaders against personal liability. But it’s important to know who and what D&O covers before choosing a policy.
What Is Directors and Officers (D&O) Liability Insurance?
Director and officer insurance refers to a type of liability coverage that protects directors of businesses and organizations, as well as those serving as officers on boards of directors. While a D&O insurance policy won’t stop someone from suing you as an employee, officer, or business owner, it will help shield your personal assets.
But when you’re asking what is D&O insurance, it’s important to note that it has its limitations. It doesn’t cover illegal acts, for instance, and your policy will have a financial limit. If you’re in a high-risk industry, you may also pay higher premiums.
What Is Covered in Directors and Officers (D&O) Liability Insurance?
Businesses and organizations should have policies in place to protect against legal action. In some cases, this policy will extend to that business’s leadership team. This is known as indemnification, which is a fancy word that means qualifying team members will be compensated for any expenses incurred as a result of a lawsuit.
But there are limits to that coverage, and that’s where D&O coverage insurance can help. A D&O policy will kick in to protect you when your organization’s policy doesn’t. But it can also be set up to cover the cost to the organization in the event of legal action. When you look at what does D&O insurance cover, though, it’s important to note that D&O insurance coverage includes bankruptcies and legal action against the company as long as fraud or dishonesty aren’t present.
Types of Directors and Officers Liability Insurance
When you look at what is director and officer insurance, it’s important to take the various options into account. There are three types of agreements to choose from when taking out a D&O policy:
Side A coverage is designed to help directors and officers who aren’t covered by their organization’s policy. Without coverage, you may have to pay out of your own bank account. This type of policy keeps hands off your personal assets, as well as those of your spouse.
The insurance D&O definition of Side B coverage is that it reimburses the organization for indemnified directors and officers. In other words, if you’re part of an organization that does cover you as a leader, that organization will take care of your costs, then be reimbursed by the policy.
This coverage only applies to publicly traded companies. Being listed on the stock exchange comes with its own risks, and Side C covers the company itself against legal action filed by shareholders or securities-related issues.
Directors and Officers Liability Insurance Process
Once you’ve determined what is D&O coverage, it’s time to look into a policy. First, gather information about your organization and the directors and officers you want covered. Then reach out to top business insurers to get a quote. From there, you can narrow down the options and choose the best coverage for the price.
Your insurance provider should issue a certificate of liability insurance for your records. Keep this handy. You may eventually need to show proof to potential investors or to companies interested in merging or acquiring your business.
Do I Need D&O Insurance?
Perhaps a better question than what does D&O insurance cover is who does D&O insurance cover. Choosing insurance coverage is always about weighing your financial risks against premium costs.
You Have a Board of Directors
It may seem obvious, but when asking what is D&O coverage and who needs it, it’s tempting to assume a smaller business or nonprofit shouldn’t budget for it. If you have a board of directors or advisors, a hefty dose of D&O insurance can help keep them safe.
You’re in a High-Risk Industry
Whether you’re a publicly traded corporation or a small nonprofit, the potential for legal action exists. But some industries face higher risk than others. Do you provide services to others? A financial institution or law firm, for instance, dispenses risky advice. One disgruntled former client can bring legal action that impacts everyone involved.
You’re Actively Seeking Funding
When you need some capital to fund your business, investors will want to reduce their own risk. One way they’ll do that is by asking for proof of insurance. D&O insurance may be required before an investor will even consider meeting with you.
You Want to Attract Top Leaders
Before someone joins your board of directors or signs on as CEO, that person wants to make sure they’re protected. Instead of asking what is D&O insurance, you can show that you have director and officer insurance in place before candidates show up for the interview. This can mean the difference between having a board of the best leaders in your industry and losing them to competitors.
What is D&O coverage? It protects the personal assets of your board of directors and officers in the event of legal action. Before signing a policy, make sure you know whether it’s Side A, Side B, or Side C coverage and check the limits and deductibles. By pricing multiple providers, you can compare quotes and make sure you’re getting the lowest rates.
Do Small Businesses Need D&O Insurance?
Small businesses need D&O insurance to protect against legal action. Whether your organization is large, midsized, or small, lawsuits can extend to your personal finances. This is where D&O insurance can help.