D&O Liability Insurance Defined
Directors and Officers (D&O) liability insurance protects directors and officers from liability arising from actions connected to their corporate positions. D&O coverage was very rare just a few years ago. The Enron and WorldCom debacles were a wake up call for many companies who began to think that D&O insurance might just be worth the price.
In 2002, the Congress passed the Sarbanes Oxley Act, which has had a major impact on directors and officers liability. Even though the act focuses on improving corporate governance by protecting shareholders, the result has been increased litigation and more fines and penalties.
What does D&O cover?
There are generally three kinds of D&O coverage, 'A-side', 'B-side' and 'C-side'. Here's a brief look at each:
- A-side. This provides coverage directly to directors and officers for losses resulting from claims made against them for their wrongful acts committed in their capacity as a director or officer.
- B-side. This coverage reimburses the company for the expense of indemnifying its directors or officers as a result of claims made against them.
- C-side. This provides coverage for a corporation's losses – separate from directors and officers losses.
Each kind of D&O insurance may be subject to exclusions and deductibles.
D&O policies are typically 'claims made'
D&O insurance is typically written on a "claims-made" basis. This means that a claim will be covered regardless of when the cause of the claim occurred – as long as the claim is made when the policy is in force. For example, if a director does a 'wrongful act' in 2005, but isn't sued until 2007, the claim will be covered as long as the company has a current D&O policy.
Evaluating your risk
Deciding whether or not you really need D&O insurance will depend upon a variety of factors including whether or not you have a Board of Directors or use venture capitalists to obtain financing. Both generally require it. Companies with employees may also want to consider it as employees can bring employment practices lawsuits against the company. Most D&O claims are brought by shareholders, employees, regulators and sometimes by competitors for unfair trade practices or antitrust claims. Experts recommend looking at all of these factors, as well as the size of your company, your industry and your corporate practices, to make sure you are adequately covered.