Directors and Officers Liability Insurance

What is Directors and Officers Liability Insurance?

Directors and Officers Liability Insurance, also known as D&O insurance, covers the cost of compensation claims made against your business’s directors and key officers for alleged wrongful acts. Wrongful acts in this context may include, but not limited to breach of trust, breach of duty, neglect, error, misleading statements or wrongful trading. D&O insurance liability policies also provide insurance for negligent acts that result in lawsuits being filed against the company. Such coverage can extend to defence costs arising out of criminal and regulatory investigations/trials as well. However, D&O insurance does not cover claims made against your organisation as a whole. 

What does Directors and Officers Liability Insurance cover?

The main objective of D&O insurance is to protect the executive management team of a business from allegations against their management decisions. The coverage needed depends on the type of industry. Financial services companies, for instance, are likely at a higher risk than retail stores. The size, debt, revenue and legal history of the company generally increases the risk for lawsuits.

Here are the key factors that affect D&O insurance costs:

  • Age or maturity of the business: A long history of good business and financial practices helps companies keep rates lower.
  • Industry type and size: Publicly traded companies, industries with higher regulations, and community exposure have increased risk and thus higher premiums.
  • Financial stability: Financially stable companies often have assets to keep costs down. However, highly leveraged companies with major investors have higher coverage needs.
  • Number of employees: Bigger companies tend to have larger boards of directors and officers, increasing the potential exposure and D&O insurance costs.
  • Coverage amount: Increasing coverage increases annual premium price. 

What is the coverage limit for Directors and Officers Liability Insurance?

As with any insurance policy, D&O insurance has exceptions, particularly in the cases of intent. If there is malicious or intentional illegal action such as embezzlement, intentional personal gain, or fraudulent activity, the policy will not provide coverage. Knowledge can also be considered an act of accountability, whether the individual or company participated in the act.