What is Directors & Officers (D&O) Insurance?

Protecting your board and your business with directors and officers insurance

In today’s litigious business environment, directors and officers insurance is essential in protecting both business and the personal assets of company leaders and board members.

According to the recent Allianz Commercial’s D&O Insurance Report, “Board members and company executives can be liable for an increasing number of scenarios. Inadequate responses to economic pressures, geopolitical issues, implementing innovative technologies such as GenAI, or environmental, social, and governance (ESG) challenges are among the main factors driving the possibility that a company and its Directors and Officers (D&O) may be sued.”

With boards and company leadership facing mounting regulatory pressure and public scrutiny, investing in appropriate D&O coverage is critical for both public and private entities since the cost to defend even a very defensible matter can quickly add up.

Fortunately, comprehensive D&O insurance can provide financial protection from lawsuits and legal claims targeted at your company, its leaders, and your board of directors. Here’s a closer look at this type of specialized liability coverage and how it works.

What is directors & officers (D&O) insurance?

In a nutshell, D&O insurance is a type of liability insurance designed to protect organizations as well as the personal assets of executives and individuals who sit on their boards if they’re sued for mismanagement, negligence, or other actions they take to fulfill their roles.

What types of incidents can D&O insurance cover?

D&O insurance policies can cover claims filed by employees, customers, competitors, shareholders, regulators, vendors, and other directors and officers who feel they have been wronged in some way by the policies, procedures, or actions of an organization. Among the common types of allegations this type of insurance can cover include:

• Breach of fiduciary duty – if directors or officers are accused of not acting in the best interests of the company or its shareholders
• Mismanagement – if shareholders, investors, or others allege that directors and officers acted negligently and led to financial losses
• Errors in financial reporting – if investors, shareholders, or regulators file a lawsuit charging that mistakes or omissions were made in financial disclosures or reports
• Non-compliance – if a company is accused of failing to follow statutory regulations, directors and officers may be held responsible
• Misrepresentation – if an organization is charged with not accurately disclosing its assets, liabilities, and capabilities
• Securities class actions – if there’s a violation of securities law, such as hiding information or spreading false details, that leads investors to purchase stock and then lose their money.

What incidents are not covered under D&O insurance?

In general, D&O policies exclude coverage for:

• Criminal act/deliberate fraud
• Pollution
• ERISA
• Bodily injury/property damage
• Pending and prior litigation
• Compensation and labor

There are also exclusions for insured versus entity suits, except in these situations:

• Derivative suits
• Employees for securities claims
• Cross claims for indemnity
• Employment claims
• Bankruptcy trustee/creditors committee
• Former directors and officers (gone at least 3 years)
• Foreign jurisdiction claims
• Whistleblower claims

What expenses can it cover?

If the directors, officers, or company are named in a lawsuit, D&O insurance can cover different types of expenses that usually arise from mounting a responsive and effective legal defense, including:

• Defense costs – which can now cost as much as $1,800 per hour compared to roughly $1,000 just five years ago
• Settlements – which now run about $34 million on average, according to recent data from the D&O Diary
• Judgments – which found corporate defendants liable for over $14.5 billion in “nuclear verdicts” in 2023.

What are the key components of D&O insurance?

To cover separate parties that may be named in a lawsuit, coverage for D&O insurance is typically divided into three different components of coverage:

• Clause A which provides personal asset protection for individual directors, officers, and employees of an organization when a claim is made and an organization cannot legally or financially indemnify or reimburse them for legal costs, typically because of financial insolvency or legal restrictions.
• Clause B which offers balance sheet protection and can cover legal costs that an organization pays out to defend individual directors, officers, and employees against claims filed.
• Clause C which is also known as entity coverage, and can protect the organization itself from financial loss when it’s named in a lawsuit.

Who needs D&O insurance?

From large corporations to small startups, D&O insurance is essential coverage in today’s business climate where nuclear verdicts and class action lawsuits continue to grow.

• Publicly traded companies –who need to protect their executives and assets from large numbers of stakeholders as well as the constant scrutiny of shareholders, regulators, and the media from a growing likelihood of lawsuits.
  
  For instance, according to a recent industry report, labor and employment class actions went from under a quarter of all class actions to nearly half among those surveyed, in just the last four years. And the number of companies that reported facing at least one labor and employment class action suit over the last five years increased from 75 percent in 2022 to 80 percent in 2023.
• Privately held firms – Although some private companies mistakenly believe they don’t need D&O insurance because they don’t have shareholders, the reality is that they can still be sued by others, such as employees, customers, regulators, and competitors, just to name a few.
• Nonprofit organizations – Nonprofit organizations are also at risk. Board members and executives of nonprofits may face lawsuits related to their fiduciary responsibilities, employment practices, or regulatory compliance.
• Startups – Due to their limited capital and resources and uncertain growth paths, small companies and startups can be at a high risk for lawsuits from investors, employees, or customers as they expand, particularly if private investors become dissatisfied if financial or operational goals aren’t met.

What to keep in mind

Indeed, D&O insurance provides a critical safety net for organizations and their leaders in today’s litigious and regulated business environment. It not only protects the personal assets of directors and officers in the event of certain lawsuits, but it also encourages strong corporate governance, stability and security. To ensure that your D&O coverage is aligned with your exposures both in the present and as they evolve, align yourself with an insurance advisory team that has the technical acumen and market reach to address your needs.

The Baldwin Group’s Management Liability Center of Excellence will work closely with you to uncover your executive risks, recommend appropriate loss controls, and tailor coverage to your specific needs. Our experts strive to align coverage decisions with independent data points, offering guidance and insights to minimize incidences of insufficient or excessive premiums. 

Let’s work together to craft the proper D&O insurance program for your organization.