Legal costs resulting from actions directors and officers have taken for their organizations are alleviated with Directors and Officers, or D&O insurance. A D&O insurance policy assures directors and officers that they can perform necessary duties without suffering personal liability. However, this does not mean that fraud and reckless behaviors are condoned.

What does D&O insurance cover?

There are three typical areas of coverage under D&O insurance.

• A-side is coverage given to directors and officers for defense costs or claims made directly against them,
• B-side coverage compensates the company when it indemnifies directors and officers.
• C-side is coverage relating to the securities of the corporation, also termed “entity securities coverage

Important Considerations

D&O insurance is a very beneficial business tool that insures a company against various kinds of risks. In addition, D&O insurance also functions as a recruitment and retention tool. Recruiting a director level candidate to join the board can be significantly easier when he/she sees that your organization has D&O insurance coverage. D&O insurance provides them with the sense of security that they will be protected in the event of being found personally liable for the organization’s violation. Companies should be aware of certain terms and conditions and the deductibles that differ depending on the following details:

• Size of the company - A company’s size directly correlates to its chances of being sued. The larger the company is, the more likely it is to be sued because complainants seek companies with “deep pockets”.
• Type of business - If your company is involved in a high risk industry or business sector, a business where customers may frequently instigate lawsuits for product deficiencies, deductibles and other costs, your premiums may be higher. The same applies to sectors where employees initiate lawsuits for issues in harassment and discrimination.
• Shareholder number and type - Similar to the company size, the number of shareholders/directors is very influential for plaintiffs considering lawsuits. A private company normally does not have to provide extensive information to shareholders, but if your company is public, it will need to relay substantial information to shareholders/directors. Once the public is privy to this information, the chances of a lawsuit will undoubtedly escalate. Considering it is in the best interest of the company to provide appropriate protection for directors, significant shareholders might request D&O insurance coverage from the company which will allow them to successfully fulfill their duties.

A change in business means a review of existing D&O insurance policy

Your D&O policy may have to be reviewed and adjusted if, among a number of factors,

• Your business changes board composition,
• Increases cost cutting efforts through terminations,
• Merges with a company regularly involved in litigation, or
• Plans to expand internationally.

Before purchasing a policy, your company should consider hiring an experienced professional to help select a D&O insurance policy for your company’s specific needs. Questions? Contact us.