Directors and officers (D&O) liability coverage is essential for every organization, large or small. Because the fallout – for companies that skimp on liability insurance generally, and particularly on D&O coverage – could be catastrophic.
D&O insurance protects the directors and officers of an organization from liability arising out of their actions taken on behalf of that organization. These actions can include: poor investment oversight, negligence, misstatements, omitting important information, and management decisions and other actions that results in financial loss to shareholders.
Startups need D&O coverage
Newly formed organizations are not exempt. In fact, they’re more likely to need D&O coverage. Startups, by their very nature, are inclined to make seat-of-the-pants decisions and will tolerate more risk, meaning the company’s principals may not have taken the time to assess all the pros and cons of a management decision. Also, after those heady first days, companies may discover that one member of the new management team is a liability waiting to happen, creating issues for the whole organization.
Finally, a D&O liability policy can protect the company itself as well as the individuals who run it. While larger organizations can probably manage a single liability issue, a smaller, newer organization may well be decimated by the same type of issue.
D&O liability is only one part of a package of liability policies most companies will require. For example, the commercial general liability policy and/or a commercial auto policy will protect against allegations of bodily injury or property damage. D&O covers only allegations of wrongful acts, typically resulting in allegations of financial loss.
The basics of D&O coverage
While most publically traded companies, as well as private or non-profit organizations, have coverage that protects the company itself from liability in the event of a claim, others cover only the directors and officers of the corporation. It’s important to discuss with your insurance professional what coverage is important for your company in your industry.
Generally, D&O coverage comprises Side A coverage, which provides a defense and pays losses arising from negligent acts of an officer or director of a company, and Side B coverage, which will reimburse corporations for losses the organization pays to indemnify their directors and officers for claims against them.
Side C coverage was added in the 1990s to offer protection to the corporation against allegations of security irregularities. Additionally, employment practices liability coverage is increasingly common on D&O policies. This coverage provides defense and indemnity against allegations of wrongful termination, sexual harassment, and other violations of state and federal employment laws.
Don’t let your D&O coverage expire
D&O policies are written on a claims-made basis, meaning coverage is triggered when a claim is made. Claims-made coverage means acts committed prior to and during the policy period may be covered. Claims that are filed after the policy’s expiration may not be covered. If you plan to cancel or move from one insurance carrier to another, care must be taken to assure continuity of coverage and avoid gaps.