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:
– Consumer groups
Some Main Exclusions on a D&O Policy include the following:
– Fraud or dishonesty
– Professional indemnity
– Illegal profits/gains
– Damage to property
– 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.