D&O Insurance To Cover Director Liability

D&O or Directors and Officers insurance is personal liability insurance specifically designed to cover senior executives and directors of a company from liability arising from potential lawsuits against them.

The cost of the insurance is usually covered by the company and will cover the costs, in full or in part, of lawsuits and judgments that arise from instances such as poor management decisions, shareholder grievances, employee dismissals and other acts that have been committed in good faith by the insured person. D&O liability insurance does not cover criminal offenses. If it did, odds are there would be a lot more corporate criminal activity than there already is.

Why is D&O Liability Insurance Necessary?

Directors and senior officers constantly walk a fine line between making complex and tough decisions, often with limited information and time constraints, that can have huge impacts, for example in acquisition or merger situations. When mistakes are made by individuals in management positions they can be held personally liable for their actions. Companies take out D&O liability insurance to protect the personal assets of the company as well as those of its directors and senior officers as individuals. It also provides the company with reimbursement when indemnifying its officers and directors. This type of liability insurance covers settlements, legal defense costs and awards on defending officers and directors from valid claims.

Put quite simply, managers do make mistakes and there is no guarantee that a company will be able to carry the heavy financial burden of defense costs involved in damages awards or prolonged legal proceedings, and may not have the financial resources to indemnify their officers or directors in the event of claims. As more companies operate on a multinational level their operations, trading partners and investors are in different jurisdictions located all over the world.

This involves directors and officers in the increased complexity of operating with different government bodies, compliance regulations and risk management in many locations. No matter how strong their business acumen or how prudently they act, this puts them in the firing line where decisions taken can result in substantial losses to their company or a third party. Because individuals in companies can be held personally liable they may be involved in litigation that can become extremely costly and prolonged.

The fundamental tasks of senior management are to make decisions, and individuals should be given the freedom to make those decisions in good faith without fear of being financially ruined by them. D&O insurance makes the risks of taking decisions transparent and manageable by supporting good corporate governance. This type of insurance offers some degree of financial security and in cases of company bankruptcy, it is often one of the few assets that provides a company, its shareholders or creditors a way to recapture a part of the loss.

Typical Claimants on D&O Policies

As director liability expands, Directors and Officers insurance claimants increase. Classic examples of typical claimants include:

– Shareholders
– Investors
– Unions
– Consumer groups
– Customers
– Competitors
– Governments
– Contractors

Some Main Exclusions on a D&O Policy include the following:

– Fraud or dishonesty
– Copyright
– Professional indemnity
– Illegal profits/gains
– Injury
– Sickness
– Damage to property
– Pensions
– Questionable payments
– Deliberate acts
– Bodily injury

D&O insurance has become a regular part of risk management in large, multinational companies, but is also becoming essential for other organizations, publicly traded or not, with potential D&O exposure. There has been an increased demand for D&O liability insurance for small and medium sized organizations although penetration is still quite low.

Understanding Professional Liability Insurance

Professional liability insurance is also known as professional indemnity insurance. It is a type of insurance that helps to protect those individuals and companies who provide services and advice, should a negligence claim be made by a client. In effect, it will help the individual or company from bearing the complete cost of defending the claim, as well as the cost of damages, should they be awarded in a lawsuit.

There are certain professions which require this form of insurance by law. These are generally those in professional practice, such as doctors and lawyers. In other cases, it can be required based on contract by other businesses.

Coverage for individuals and businesses is important as it will cover a myriad of possible claims. For example, it will cover an alleged failure to perform the agreed upon terms of a contract. It will also cover the policy holder for any financial loss caused by an error in the service being sold.

Such instances and particulars are not covered by the more general insurance policies, and as legal claims are still rising, it makes very good sense to get as much coverage as possible. Certain policies will also cover defense costs in certain circumstances, but they are specific to the policy and the company providing the policy.

However, there are certain things that liability insurance does not cover. The major point to note here is that criminal prosecution is not covered under such a policy. Likewise, there are many liabilities which come under civil law which are not covered.

Based on the profession, this form of insurance can be termed differently. As such, in the medical profession it is known as malpractice insurance. Lawyers, consultants, brokers and insurance agents use the term, errors and omissions (E&O) insurance, to refer to the same type of policy.

When looking for coverage, here are some of the factors to consider:

Worldwide coverage - this is important as a large part of business today is conducted via the internet. With this aspect of the policy in place, it means that the policy will cover the business for work completed anywhere in the world, provided the covered claim is filed in the US (but it can vary from one insurance company to the next).

Covering past work - this is something to be vigilant of. If this is included in the policy it means that any claims arising from work completed before the insurance policy was taken out is also covered. The actual date will be agreed upon before the policy is signed, but this does provide added security.

Responsiveness to claims - knowing how quickly the insurance company will take to defend the claim made against the business is vital. The very best policies will defend the business immediately, which protects the business and provides time to gather the details.

Professional liability insurance is required in certain circumstances, but it is also recommended for businesses engaged in contractual work in the professional services industry.

Understanding Small Business Insurance

Regardless of the size of your company or the number of people it employs, it is essential to carry adequate insurance. Failure to do so could result in financial ruin or the dissolution of your business.

There are countless different types of small business insurance available including liability insurance, property insurance, business interruption insurance, workers’ compensation insurance and flood insurance, just to name a few.

Rather than buying separate insurance policies for all of these different concerns, many small business owners buy what is known as a Business Owner’s Policy (BOP).

BOPs typically bundle three types of insurance together: property insurance, general liability insurance and business interruption insurance. The following section looks at how each of these types of insurance can help protect your company.

Property Insurance

Like its name implies, property insurance helps protect any physical property that is owned by your business. This includes items like computers, furniture, equipment, supplies and inventory. This type of insurance usually includes coverage for accidental damage or destruction caused by fires or other catastrophic events.

General Liability Insurance

The second type of insurance included in a BOP is general liability insurance. This type of insurance covers any damage that is done to someone else’s property or person by you or one of your employees. For instance, if you operate a moving company and one of your employees accidentally breaks a homeowner’s vase, the liability insurance will help cover the cost of the broken vase.

Business Interruption Service

The third, and perhaps most important, type of insurance that is included in a BOP is business interruption insurance. This type of insurance helps cover the loss of income that you suffer if your business is unable to operate.

For instance, if a hurricane comes through and wipes out your facility, the insurance would help cover the cost of the downtime while you get your company back on track. Typically this type of insurance also helps cover any extra expenses that are incurred if you are forced to move to a temporary location.

What is Not Covered by a BOP

A BOP covers the basics for most small businesses. However, there are some things that it does not cover that you may need, depending on your location and whether or not you have employees. Here are a few of the additional types of insurance you may need to purchase.

Workers Compensation Insurance

If you have employees, you will need to purchase a workers compensation policy for them. This covers expenses for work-related injuries.

Flood Insurance

If you live in an area that experiences frequent floods, you will need to purchase flood insurance separately from your BOP. A flood insurance policy usually will cover your building and its contents.

Industry-Specific Insurance

Depending on the industry that you are in, there may also be other types of insurance that you need to carry. It is important to meet with a qualified insurance agent who is familiar with your industry to make sure you are adequately covered.

Small business insurance is absolutely essential. It helps protect your company from financial ruin in the event of an accident or natural disaster. Knowing which policies to carry is the best way to safeguard the future of your business.