What D&O covers
Board members, company executives and other employees make decisions every day that can cause an actual or perceived loss to others, such as:
- Employee discrimination
- Company asset misrepresentation
- Workplace law noncompliance
- Intellectual property theft
- Enticing customers from competitors
- Mismanagement of company funds
- Libel, slander, or copyright infringement
- Breach of fiduciary duty causing bankruptcy or financial loss
If someone suspects wrongdoing, they may sue the company and the person responsible.
Directors and officers liability insurance covers legal expenses that can arise from such a lawsuit, including attorney fees, court costs, settlements and awards.
Expert InsightD&O insurance covers allegations, whether they’re true or not. It can be expensive to fight allegations in court and cost even more to settle or pay a judgment.
How does it work?
D&O insurance policies are typically divided into three parts, or sides:
- Side A provides non-indemnifiable coverage. It reimburses out-of-pocket costs that individual directors and officers may have to pay when personally named in a lawsuit.
- Side B reimburses a business for damages or losses it pays for directors and officers the company indemnifies.
- Side C, also called entity coverage, covers publicly traded companies from securities claims.
If your company has strong financials and liquid assets, you could opt for Side A coverage only, which can provide coverage for claims that aren’t indemnifiable – where losses aren’t reimbursable – such as a bankruptcy claim filed against an individual director or officer. The extra cost of Side B and Side C coverage protects the company from potentially high litigation expenses.
Here are some reasons someone may file a D&O lawsuit:
- A male director fires a female employee, who sues the director and company for gender discrimination and wrongful termination.
- A pair of vice presidents leave to start their own company. Their former employer sues them for intellectual property theft.
- A director inflates the company’s value to get a loan. The creditor finds out and sues for misrepresentation of company assets.
Who is covered under D&O?
D&O insurance protects corporate board members and officers from lawsuits resulting from accusations of bad investment advice or mismanaging funds.
Any company can benefit from D&O insurance coverage if it has a board of directors, whether they’re an established business or a startup.
How to determine how much D&O you need
Lawsuits against officers and directors are becoming more common, with 26% of private companies experiencing a D&O claim over a three-year period, according to a 2018 Chubb Insurance study. The average loss reported in the survey was $400,000.
It can be expensive to fight allegations in court and cost even more to settle or pay a judgment. D&O insurance covers allegations whether they’re true or not.
A lawsuit could mean financial ruin for the director involved and the company without adequate D&O insurance coverage.
“A CEO running an uninsured – or underinsured – company could easily find themselves with little to no protection, forcing them to use personal assets to fund their own defense and leaving them personally liable for any resulting damages awarded by the courts,” says Nick Flores, a partner and commercial insurance advisor at The Mahoney Group law offices in Mesa, Arizona.
“Publicly traded companies with boards of directors – and teams of lawyers – know they can’t live without D&O,” Flores says. “But the executives and owners of smaller, private companies are regularly sued, too, and so going without D&O leaves them open to what could be devastating claims.”
The Insurance Information Institute, an insurance industry trade group, notes there are different D&O policies that are defined by liabilities, legal costs and other exposures. Triple-I says companies should select coverage based on their risks and how their businesses are organized.
It’s a good idea to get enough coverage to protect the company’s and its leaders' assets. An experienced commercial insurance agent can help you determine the appropriate amount of D&O coverage.
How much D&O costs
D&O insurance coverage costs an average of $138 per month, or $1,653 annually, according to data from small business insurance brokerage Insureon.
Multiple factors affect the cost of D&O insurance coverage, including:
- Business finances
- Claim history
- Number of employees and board members
- Initial public offering potential
- Risk profile
- Policy coverage, limits and deductible
The cost can also vary by state.
State | Average monthly premium | Average annual premium |
---|---|---|
California | $207 | $2,478 |
Florida | $107 | $1,282 |
Georgia | $244 | $2,925 |
Illinois | $113 | $1,352 |
Michigan | $99 | $1,189 |
New York | $124 | $1,492 |
North Carolina | $78 | $939 |
Ohio | $190 | $2,282 |
Pennsylvania | $113 | $1,356 |
Texas | $142 | $1,704 |
U.S. Average | $138 | $1,653 |
Which insurance companies sell D&O
Many commercial insurance companies that sell small business insurance also provide D&O insurance coverage, including:
- AIG offers standalone or modular D&O liability insurance policies, which can cover other management liability needs such as employee practices liability, crime and fidelity and fiduciary liability.
- The Hartford has more than 200 years of experience providing business insurance of all types. You can request a business insurance quote online.
- Liberty Mutual’s claims and underwriting teams work closely together to tailor D&O solutions specific to each entity: nonprofit, private and public companies.
- Nationwide’s D&O insurance policy is just one of its commercial liability products, which also include crime, employer’s liability and independent director liability for nonprofit, public, and private U.S. companies.
- Travelers provides D&O insurance for nonprofit and for-profit businesses. The insurer can help determine your risk profile and whether you may need other policies to protect your business, such as management and professional liability, cyber or transactional risk insurance.
D&O insurance coverage and cost can vary widely, so it’s worth gathering several quotes from different companies to find the policy that meets your unique needs. An experienced D&O insurance broker can save you time by asking the right questions to develop your business and risk profile, gathering quotes and helping you compare them to find the ideal policy and company.
Are there any ways to save on D&O?
Comparing D&O insurance quotes can help you find the best policy at the cheapest price. Here are other ways to save on directors and officers liability insurance.
Re-evaluate your coverage needs annually
A lot can change in a year, including your risk tolerance and coverage needs. Completing an annual evaluation before your D&O insurance policy renews can help ensure you’re only paying for the coverage you need.
It also doesn’t hurt to compare D&O policies from other insurance companies to determine if your current policy is still the best fit. Consider companies with experienced D&O specialists and superior claims handling reputations.
Implement loss prevention measures
Putting risk prevention measures in place lowers your chance of filing a claim and makes you a less risky business to insure, which can help reduce your insurance premiums.
Loss prevention measures can include:
- Completing product liability audits
- Engaging intellectual property counsel to prevent false advertising or other potential claims for online or published media
- Implementing director training programs
- Creating formal anti-fraud policies
- Requiring dual control for internal accounting practices
Minimize the risk of an employee lawsuit
Employee lawsuits against the company, a director or a manager are among the more common D&O lawsuits. According to the 2017 Hiscox Guide to Employee Lawsuits, the average employee lawsuit takes almost a year to resolve and costs about $160,000 for defense and settlement expenses.
Whether you’re a nonprofit, public or private business, you must comply with all federal and state employment laws if you have employees. The Equal Employment Opportunity Commission (EEOC) provides tips for small businesses to reduce their risk of a lawsuit from an employee – especially for discrimination and harassment – including creating employee policies that are clear and strictly enforced.
How to file a D&O claim
Preparing for a D&O claim before it happens can ensure you’re ready if you’re sued. If you do need to file a claim, these are some of the steps you should take:
- Read and understand your policy. Your policy contains pertinent information you need for your claim’s success, such as your coverage limits, exclusions and what type of claims the policy covers. Read the fine print and ask your agent any questions you have to ensure a smooth claims process.
- Inform your insurance company. If you become aware of a situation that could lead to a D&O claim, like accusations of theft of intellectual property or employee discrimination, notify your insurance company. Preserve all evidence and make sure you fulfill your obligations as laid out in your insurance contract.
- Consider seeking your own legal counsel. Your D&O insurance policy includes legal defense costs, and your insurer may have in-house counsel to represent you, but if your case is particularly nuanced or complex it may help to have an outside attorney who specializes in D&O claims. They can help you interpret legal terminology and ensure the claim process is accurate and working in your favor.
- Cooperate with the investigation. Be prepared to answer questions and provide documentation to aid in the insurance company’s investigation.
- Negotiate and settle. If the insurance company determines the claim is valid, it then works toward a settlement. Make sure to review the terms and conditions carefully before accepting the settlement. This is where outside counsel can be especially valuable. The case may proceed to trial if you can’t reach a settlement.
What our expert says
Q: What’s the risk of not having D&O insurance?
