Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company. Many officers and directors will want a company to provide both indemnification and D&O insurance.
Directors and officers are sued for a variety of reasons related to their company roles, including:
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Misrepresentation of company assets
- Misuse of company funds
- Failure to comply with workplace laws
- Theft of intellectual property and poaching of competitor’s customers
- Lack of corporate governance
Illegal acts or illegal profits are generally not covered under D&O insurance.
Does Your Business Need D&O Coverage?
Any business with a corporate board or advisory committee should consider investing in D&O insurance, including non-profit organizations. Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.
Directors and officers liability insurance applies to anyone who serves as a director or an officer of a for-profit business or nonprofit organization. A directors and officers liability policy insures against personal losses, and it can also help reimburse a business or nonprofit for the legal fees or other costs incurred in defending such individuals against a lawsuit.