Purchasing insurance to cover operations is one of the costs of doing business. However, when analyzing business risks and taking measures to protect against them, organizations may sometimes overlook Directors and Officers (D&O) liability insurance.
A D&O liability policy serves as an effective asset protection tool to help cover the defense costs, judgements, and settlements associated with lawsuits. Additionally, the policy can help protect the potential personal liability that a director or officer could face if the entity is unable to indemnify them for their actions or decisions.
"Directors and officers have a fiduciary duty to make sure their organization is managed appropriately. You could be sued for even the perception that you've broken that fiduciary duty and are operating the business improperly," says Will Carlin, VP, Executive Risk Practice D&O Lead at Huntington Insurance.
Misconceptions about D&O liability insurance can cause business leaders to think twice about purchasing a policy – at their own risk. This article provides an overview of D&O liability, breaks down five common misconceptions about this type of policy, and demonstrates the benefits of being protected.
What is D&O insurance?
D&O coverage is designed to protect directors, officers, and the corporation. It provides coverage against financial loss caused by litigation brought against the organization or board for actual or alleged wrongful acts involving their actions or decisions made on behalf of the organization.
Five D&O liability insurance misconceptions
1. You don't need D&O insurance because your business is privately held
The executives of private companies have a duty to act in the best interest of the organization and to make decisions free of any conflicts of interest. They may face lawsuits from customers, employees, creditors, regulators, competitors, vendors, and minority shareholders for perceived failure to act in this manner.
2. D&O insurance is unnecessary because your business is family-run
While family members might trust each other implicitly, disputes can still happen. When these claims involve family members, they can be more contentious and expensive due to their personal nature.
You could also be liable for claims from non-family members working within the family-run company. For example, a group of employees could file a lawsuit if there is even a perception of unfair practices related to nepotism or other discrimination.
3. As a nonprofit organization, you don't need to spend money on D&O insurance
Nonprofits face many of the same exposures as for-profit, private companies.
"Nonprofits have a significant amount of exposure. Are they handling funds correctly? Are they making promises to donors they can't fulfill? Even the conduct of their volunteers could trigger a claim against a nonprofit," says Ashley Bauer, VP, Executive Risk Practice Leader at Huntington Insurance.
The oversight and direction provided by a not-for-profit board of directors can lead to various lawsuits including the perception of donation mismanagement, lack of formal policies, antitrust claims, and conflicts of interest.
4. You've never had an incident before, so why would you need D&O coverage?
It only takes one incident to cause irreparable damage to an organization's and individual's finances and reputation. Claims brought against an organization can result in additional claims brought by minority stakeholders, or employees against board members or specific officers.
"Take the #MeToo movement," says Carlin. "There will be an initial employment practice claim for harassment or discrimination, but a subsequent Directors and Officers claim can be brought against the board for breaching their fiduciary duty to the organization and not creating an appropriate culture within the company."
5. Your company's liability insurance coverage will protect you if you’re sued
Many companies assume their general liability insurance offers coverage for any event resulting from their actions or behavior. However, these general liability policies are not designed to cover decisions made by the company's directors and officers.
"Directors and officers can be named and sued individually," explains Bauer. "Without protection through a D&O policy, anyone serving on a board or running an organization may be left to pay for the loss if they're sued personally."
Protect your finances with a dedicated D&O policy
Directors and officers at any company – whether public, private, or nonprofit – could be held liable for any actions or decisions made on behalf of the company. Having a dedicated policy could save personal assets, but it's essential to understand how the policy functions, what it covers, and how it interacts with other insurance policies the company might hold.
"Directors and officers insurance policies tend to be more nuanced than property or casualty policies," says Carlin. "Fully understanding the implications of this coverage can be a challenge. That's why a number of insurance brokers have dedicated Executive Risk Practice teams like ours that focus solely on these lines of insurance."
Protecting personal and company finances is critical in today's litigious environment. To learn more about how D&O policies work and find the right fit for your organization, contact your relationship manager.