Directors and officers liability insurance is a must for companies with exposures related to their business management policies. This insurance, often referred to as d&o, protects corporate directors and officers in the event they are personally sued by any number of people including investors, employees, vendors, competitors, and customers, to name the parties usually affected by their choices or decisions. The policy also covers legal fees, settlements, and other costs and can extend to protect the company if it’s named in a suit as well.
D&O is made a requirement by many investors
In many cases, when appointing directors or hiring new officers, they will demand d&o coverage as a condition of serving or terms of employment because they simply don’t want to put their personal assets at stake. In many instances outside investors, such as venture capitalists or other financiers, will require d&o policies before providing funding to a business, since they see the coverage as a way to protect their investment.
Common reasons why directors and officers face litigation
Directors and officers are sued for a variety of reasons connected with their company positions, including:
- Misuse of company funds
- Misrepresentation of company assets
- Failure to comply with workplace laws, and
- Lack of corporate governance among other issues
The simple process of hiring employees potentially exposes directors or officers to employment practices litigation, which is often covered by d&o policies. Employment Practices Liability (EPL) coverage will provide more robust coverage, which is often warranted, since it protects not only directors and officers, but also the company itself.
Claims over employment practices are now the most common lawsuits brought against a company’s management. A substantial percentage of all reported d&o claims in recent years stems from public, private, and nonprofit entities.
While some small business executives believe that their general liability or umbrella business insurance policies will cover claims involving directors and officers, generally speaking, general liability or umbrella policies don’t respond to management liability lawsuits. A business of any size will usually have officers as well as directors who can be targeted by litigants over their management of company affairs, and the cost of insurance is insignificant compared to the protection it provides against a settlement costing a million dollars or more.