You have finally made it. Maybe it’s a business you’ve built into a profitable, self-sustaining firm or a nonprofit you’ve nurtured into an active organization. You’ve grown beyond what one person can responsibly handle. You may need directors to oversee your organization’s objectives, and officers to implement policies and manage operations.
When you bring in additional levels of executive management, you incur executive risk. Whether they’re volunteer board members or C-suite employees, they become legally liable for responding to claims made by your organization’s shareholders, beneficiaries, and other stakeholders.
Among other things, directors and officers can be found liable for embezzlement, depreciation of assets, mismanagement of employee retirement funds, and missed business opportunities. You might not want to think about these possibilities, but they can happen to the best of companies.
Even if your board and employees are innocent, you still have to mount a legal defense. That’s where directors and officers (D&O) insurance comes in.
Basic D&O coverage
D&O insurance has long been associated with corporate boards of directors. But more executives of privately held companies and nonprofit board members are purchasing D&O policies to protect themselves against lawsuits alleging managerial misconduct. These include family-owned companies.
The three “sides” of D&O insurance
D&O policies typically include up to three coverage parts, known as “sides.”
- Coverage A (“Side A”) protects individual directors and officers when the organization cannot indemnify them due to events like insolvency or legal prohibition.
- Coverage B (“Side B”) reimburses the organization for costs incurred when it “indemnifies” directors and officers, or protects them against personal liability.
- Coverage C (“Side C”) covers the organization for certain types of entity‑level claims. For publicly traded companies, this coverage is usually limited to securities claims. (A securities claim is an allegation that a company or its leaders misled investors or violated securities laws in connection with the purchase, sale, or value of the company’s securities.)
Your directors and officers are protected against covered claims under Side A, which supports individuals directly, or Side B, which reimburses your company for the defense you provide them with. How your company covers these costs depends on your bylaws and your state’s laws.
Because Side C shares the same limit of liability with Sides A and B, a significant claim can erode the policy limit. This would leave your individual directors and officers with less protection.
How do businesses prevent coverage from becoming exhausted?
There are several reasons why coverage under a single side of a D&O policy may not be enough.
As suggested above, the insurance coverage can quickly be depleted, leaving your individual officers and directors to pay out of pocket for their defense and damages. As jury-awarded settlements continue to exceed $10 million (aka “nuclear verdicts”), policy limits can quickly be exhausted.
Also, D&O policies commonly contain exclusions for liability insured under other types of policies. They may also exclude “insured versus insured” claims if a board sues an officer for negligence or wrongdoing.
Additional D&O protection options
No overview of D&O coverage is complete without noting the extra protection available.
- A Side‑A only policy adds dedicated coverage for individual directors and officers beyond the main D&O policy.
- An enhanced Side‑A policy offers even broader protection for individuals by removing many standard limitations and exclusions. It also often expands what qualifies as a claim.
- An outside directors liability policy protects your executives when they serve on outside boards, such as trade groups or chambers of commerce.
Your insurance agent can help you determine which options make sense for your organization.
What D&O policies don’t cover
D&O insurance does not protect your directors and officers from every type of liability they may incur.
For example, a D&O policy generally does not cover directors and officers for claims alleging bodily injury or property damage. (However, an enhanced Side-A policy may include some coverage.)
D&O exclusions that require you to have other coverage
In recent years, D&O insurers have increasingly tightened exclusions and reduced available coverage for claims connected to:
- Cyberattacks and data breaches, including system compromises
- Employment practices–related allegations, which are typically addressed under employment practices liability insurance (EPLI)
- Environmental or pollution-related liability
If your company has exposure in any of these areas, your leaders may need coverage under separate policies, such as:
- Cyber liability insurance. D&O policies often exclude tech services or failures to maintain cybersecurity, due to the frequency and severity of cyber claims. Carriers expect businesses to purchase stand-alone cyber liability insurance.
- EPLI claims were never intended to fall under D&O coverage. Carriers continue to reaffirm and tighten EPLI-related exclusions, especially as litigation fees and settlements enter the millions.
- Environmental claims (pollution, contamination and bodily injury from pollutants) are excluded under most liability forms. Most D&O policies have broader pollution exclusions and fewer exceptions (or “carve-backs”) in response to high-cost environmental litigation. Chemical risks, such as per- and polyfluoroalkyl substances (PFAS), have also drawn scrutiny for contaminating groundwater and soil and causing disease. Carriers expect businesses to purchase environmental liability insurance.
D&O policies exclude criminal acts
- Like all insurance, D&O policies will not cover intentional criminal acts. However, the insurance company is required to provide a defense before that determination is made. Once a non-appealable determination of guilt is made, the insurance company can refuse to pay from that point on.
- For this reason, it’s crucial to have a “severability” clause in your D&O policy. Severability ensures that if one director is found guilty of a criminal act, the remaining innocent directors and officers don’t lose their coverage.
Other important coverages that protect against liability
Include your executives on the list of insureds named under your commercial general liability (GCL) policy and other liability policies, such as commercial auto policy. You can add hired and nonowned auto (HNOA) insurance to your auto policy to cover any employees who drive their personal vehicles for business reasons. Finally, make sure you have sufficient workers’ compensation to pay for employees injured on the job. (It’s legally required in most provinces.)
Call us about structuring a D&O policy
Talk to us about a D&O policy with the best protection for your company’s operations and executives. With thoughtfully structured coverage, you can recruit the best and brightest to help lead your enterprise, knowing they and their assets are protected.
