Do You Need D&O Insurance?

D&O insurance, also known as directors’ and officers’ liability insurance, forms part of the broader management liability insurance category. This type of insurance aims to protect the directors and officers of a company or organization, and often also the organization itself, in case legal action is brought against one or more insured parties for alleged wrongdoings during the execution of their duties. D&O insurance does, however, typically not cover intentional unlawful acts.

What Type Of Benefits Does A D&O Policy Hold? 

Suppose an organization’s customers personally sue a director or officer, investors, competitors, vendors, employees, or other parties for alleged or actual wrongdoing while doing their jobs. In that case, a D&O policy can help to protect their and their spouses’ assets.

The policy typically covers the cost of settlement and legal fees resulting from the following types of claims: failing to comply with laws and regulations related to the workplace, inadequate management, failing to perform official duties, intellectual property theft, fraud, abuse of the organization’s funds, breaching their fiduciary duties, and misrepresenting the organization’s assets.

Who Needs D&O Insurance? 

Let us take a closer look at who could benefit from D&O insurance.

For-Profit Organizations  

The typical candidates most people would think of when D&O insurance is mentioned are directors and officers of for-profit organizations. These people often control financial, physical, and other assets worth millions if not billions of dollars. If a third party should, e.g., sue the firm for intellectual property theft because of what they did, and the firm doesn’t have liability insurance, the obvious next step would be to personally sue the directors and officers.

Without D&O insurance, they could easily be destroyed financially. This is why many directors and senior officers nowadays insist on D&O insurance before considering an appointment.

Non-Profit Organizations 

This group includes all volunteer organizations that have some or other type of board. Examples include a school board, church board, softball league, little league, kids t-ball, etc.

Claims of breach or neglect of duties in the course of managing the organization or mismanaging it will often be directed at the board of directors as a whole. Individual members can, however, also be sued. In these cases, a good D&O insurance policy could protect every individual member of the board and his or her personal assets against financial ruin.

This type of lawsuit is often brought by third parties such as clients or members of the public, but it can also be brought by employees. Depending on the particular circumstances, these claims can sometimes be quite frivolous. They can, however, also be severe and include issues such as conflicts of interest, mismanagement of funds, wrongful termination, breach of fiduciary duty, and discrimination.

In these cases, D&O insurance can provide coverage for the costs involved with defending the individual or individuals against the claim, judgments, and settlements that might be reached.

D&O Insurance vs. Liability Insurance

At this stage, it is important to note that there is a difference between D&O coverage and general liability coverage. D&O insurance covers the insured parties against claims related to how board members and officers perform their duties. It specifically excludes property damage and bodily injury. General liability insurance, however, does provide coverage in cases of property damage or bodily injury.

Let us look at an example. If a child should get hurt during a little league game, the parents might sue the little league for negligence. If this happens, and the latter does not have liability insurance, the board members could be sued as individuals. That is why non-profit organizations need to have both D&O coverage and liability coverage for their volunteer leadership.

If you have questions about D&O insurance, give us a call, we’d love to help.