The growing demand for business transparency and accountability has led to a higher number of employment-related claim exposures for officers and directors.
The Importance of D&O Insurance
The directors’ and officers’ liability obligations during and after the Dot Com boom from 1998 to the first quarter of 2000 led to the creation of the Sarbanes-Oxley Act in 2002. This federal law established a sweeping audit process and increased financial regulations for public companies. Lawmakers created the legislation to help protect shareholders, employees, and the public from accounting errors and fraudulent financial practices.
Directors and Officers (D&O) coverage is essential for large corporations, privately held companies, and nonprofit organizations. The legal costs to defend a director or officer can be substantial, as well as the potential personal penalties that may be handed down.
What Does a D&O Policy Cover?
Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a D&O policy specifically covers “wrongful acts,” such as:
- Actual or alleged errors and/or omissions
- Misleading statements
- Neglect or breach of duties
For example, if an electrical contractor advised a supply warehouse to increase its inventory of conduit and electrical fittings in anticipation of increased job demand but then chose a different supplier, the original supplier could sue for damages incurred due to overstocking.
Types of Coverage in a D&O Policy
A D&O policy provides defense costs and indemnity coverage to the entity listed on the policy declarations. Coverage may include:
- Protection for individual directors and officers
- Reimbursement to the organization for its contractual obligation to indemnify directors and officers
- Protection for the organization or entity itself
Exclusions and Additional Considerations
A “fraud” exclusion is typically included in a D&O policy, eliminating coverage for losses due to dishonest or fraudulent acts or willful violations of any statute, rule, or law.
D&O coverage can be tailored to specific business needs, but policy forms vary among carriers. The complexity of D&O claims requires carriers with market commitment, deep expertise, and financial resources to handle potential claims.
Additional Coverage Options
Other forms of coverage, such as Employment Practices Liability Insurance (EPLI), can be added to enhance protection for directors and officers. Working with an experienced broker can ensure that your policy aligns with your company’s risk exposure.
Who Is Most Likely to Sue?
Statistics show that shareholders and employees are the most likely groups to sue private companies in a D&O lawsuit. Other potential litigants include competitors, creditors, regulatory bodies, and corporations filing claims against themselves.
A professional broker will assess your organization’s needs and craft the appropriate policy language to meet your specific requirements.
For further questions on this or any other risk management topic, please contact us. We’ll see you again soon!
