Directors & Officers (D&O) Insurance: What You Need to Know

What is it?

Directors & Officers insurance protects a company’s board directors and executives from personal financial loss if they are faced with business-related lawsuits.

Such lawsuits can stem from a variety of business matters such as contract disputes, regulatory violations, lack of disclosure, unfair trade practices, bankruptcy, breach of fiduciary duty, consumer protection violations, financial mismanagement, etc. Furthermore, these claims can come from a range of sources including vendors, government agencies, customers, investors, or employees.

In most instances, D&O insurance covers the directors and officers directly; however, it can also be structured to cover the organization, if the organization has indemnified those individuals and therefore has the burden of defending them.

What does it generally cover?

D&O insurance covers the defense costs of these lawsuits, and the settlements resulting from them, where applicable.

What does it generally not cover?

D&O insurance does not cover costs or settlements resulting from lawsuits between leaders of the same company and does not cover the costs associated with instances of fraud.

Who needs it?

Public companies may consider it a must-have, given the complexity of the business, the large number of directors and officers involved, and the large number of shareholders who have a scrutinizing eye on their investment.

Non-profit organizations may consider it a must-have as well since they are governed by a board of directors and bear fiduciary responsibilities.

Private companies reside in a grey zone. Having the coverage is not a bad idea, however, the need for it increases along with the business’ size and complexity. In many instances, it may even be required by external parties such as venture capital or private equity investors.

Aside from protection, D&O insurance may become necessary if a company is trying to recruit talented leaders who want to know they can serve the company without fear of personal loss.

What does it cost?

Each circumstance is unique and should be reviewed with an insurance provider to determine the right amount of coverage and cost. That said, D&O insurance is ordinarily issued in amounts between $1 million and $10 million, and routinely ranges in price from $1,000 to $10,000 per $1 million of coverage, per year.

Investing involves the risk of loss. Information provided is for informational purposes only, and should not be construed as advice. For your specific planning needs, please seek the advice of Integris, your tax accountant, attorney, insurance agent, or other professional as appropriate.