Why All Companies Need D&O Liability Coverage

Directors and officers liability coverage is a key component of an executive liability portfolio.

This type of insurance protects the management team in both corporate and nonprofit organizations when they make business decisions that fall within the scope of their duties as directors or officers of the company.

D&O liability insurance provides coverage for claims made against directors and officers. This could include omitting important information, committing an actual or alleged error, or breaching corporate duties in a way that results in financial loss to shareholders.

Important for small companies

D&O coverage is not just for large companies. In fact, it is even more important that small and midsize business owners carry this coverage because of the amount of risk involved.

While larger companies without this form of protection can usually weather the risk, one claim may well sink a smaller business.

While you might think non-profit organizations would be exempt from a claim, that is not always the case.

Many non-profits actively seek donations. However, if a donor feels that the funds he or she has contributed have been mismanaged or the money was not used the way the donor had intended, he or she can sue to recover the donation. This would be a D&O claim.

Non-profits also need this coverage to protect their boards of directors.

Take, for example, homeowner and condominium associations, where boards of directors are usually made up of residents of the association.  Say the association board decides to increase monthly fees to redecorate the halls or add amenities, against the wishes of other residents of the association. The residents who do not agree with the board’s position may sue, citing self-interest on the part of the directors.  This also would be a D&O claim.

D&O is not General Liability

One important point: D&O coverage is not general liability coverage, although the two are sometimes confused.

For example, if a member of a homeowners association, who, coincidentally, is also on the board of directors, injures someone while clearing snow from the building’s parking lot, this would be a general liability claim.

The injury did not arise as a result of the member’s duties on the board of directors and D&O coverage is not applicable here.

Defense coverage key

One key benefit of a D&O policy is defense coverage, and this benefit alone is worth the cost of the policy. It means that the insurance company will defend you in the case of an actual or alleged event.

Directors and officers coverage varies widely among insurance carriers.

It is very important to have a trusted insurance advisor who can guide you to the best coverage for your needs.

If you are an officer of an organization that doesn’t have D&O liability coverage, you might want to consider investigating it.

The cost for $1 million in coverage can range from $750 to $1,000, depending on the size of the organization, and many believe it’s well worth it.

An ounce of prevention is worth a pound of cure.