What Does Directors and Officers Liability Insurance Cover, and Should I Get Personal Coverage?
Companies use Directors and Officers Liability insurance to cover losses and defense costs incurred by allegations against officers or directors regarding wrongful acts or illegal activity. These allegations can involve specific actions taken by a member of the board of directors or a company officer, or they can involve actions taken by the company for which the plaintiff or prosecutor is holding the accused responsible.
Most companies retain a directors and officers (D&O) liability policy in order to help protect themselves from risks involving legal action against their board and the subsequent costs, damages and defense expenses that can result. In addition, some board members or officers choose to purchase their own personal liability policy to protect against actions taken against them regarding their decisions made.
To learn more about what coverage D&O policies provide — and whether you should explore options for supplementing company coverage with personal coverage — read on.
What Situations Does a Directors and Officers Insurance Policy Cover?
Civil lawsuits and criminal charges are situations where directors and officers coverage would apply. Note that D&O coverage does not apply to situations where a director or officer deliberately broke the law.
Increasingly, individuals alleging wrongful acts or violations of the law sue both the company involved as well as one or more of the top decision-makers in an attempt to attribute maximum accountability. These actions may be taken by clients, customers, outside parties, regulatory agencies and other third-parties. Actions may also be taken by internal actors, including shareholders, investors and current and former employees as well as current and former board members and trustees.
Looking at specific situations, a breach of fiduciary duty is a common cause of action where D&O coverage may apply. A creditor may allege that the company failed to take actions to pay off its debts on time, or investors may allege that the company acted in bad faith when making financial decisions that were beneficial to individual employees but not the company as a whole.
D&O policies can also provide coverage in response to allegations that company failed to comply with workplace laws or regulatory laws. Securities litigation and federal agency-led regulatory action can involve both criminal and civil legal actions taken against multiple board members simultaneously.
Allegations of misrepresentation are yet another common instance where D&O coverage may help protect against damages and loss. Clients may sue a company that fails to meet the terms of a contract because they allegedly lacked the capability to fulfill it in the first place, for example.
Overall, the aim of D&O insurance is to protect the leadership positions of a company from the same liabilities and potential losses that can occur when the company itself is sued.
Should an Individual Serving on a Board Purchase Individual D&O Coverage in Addition to What Is Provided by the Company?
The choice to supplement company coverage with your own personal policy should be made based on the perceived risk of legal action and the strength of the coverage already offered by a company.
Individuals given officer titles or positions upon the board of directors should review the named benefits offered by their associated company’s D&O policy as well as their current exposure to risk. Review the company in question’s history of lawsuits, for example, and its internal systems for creating accountability while preventing actions that could prompt legal recourse.
If you want to learn more about acquiring directors and officers insurance, whether for your company or for yourself, you can speak to a commercial insurance provider expert today.