Summary: Directors and Officers (D&O) Insurance protects an organization’s executive board if they are named in a lawsuit. The insurance covers costs and damages (awards and settlements) that arise from wrongful action allegations and lawsuits brought against members of the board of directors or an officer of an organization. Learn why this insurance is a must for businesses of all sizes. How Does D&O Insurance Work?
Business leaders and executive teams are held accountable for their actions more than ever before. Stockholders, investors and employees hold an organization’s directors and officers more responsible for their workplace behaviors, management and financial practices. International regulations, especially data protection laws like the
General Data Protection Regulation (GDPR) or the
California Consumer Privacy Act, are growing in significance around the world. Company management can now be held responsible if a company fails to comply with these laws. Increased corporate governance for public, private and non-profit companies means there are more liability risk exposures requiring specialized insurance coverage.
What is Directors and Officers Insurance?
Directors and officers (D&O) liability insurance protects directors and officers in the event they are personally sued when managing a company or nonprofit organization. The insurance covers costs and damages (awards and settlements) that arise from wrongful action allegations and lawsuits brought against members of the board of directors or an officer of an organization. A D&O policy can help reimburse a business for the legal fees, settlements and other costs of defending directors against a lawsuit. A director or officer can be part of a lawsuit for a company even if they no longer are part of the executive team or no longer works for the organization.
Common Directors & Officers Risk Scenarios
Organizations and their leaders are open to a variety of risks. Leaders can be held responsible for a myriad of issues at their business, from compliance and finance to workplace safety. They can also be blamed for a company’s financial issues or even bankruptcies. The list of exposures for directors continues to grow, especially as issues such as cyberattacks become more prevalent.
A costly lawsuit for any one of the following risks could cripple an organization both financially and logistically:
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Failure to comply with laws and regulations • Lack of, or poor corporate governance
- Employment issues
- Workplace harassment
- Misuse of company funds
What does D&O Liability Insurance NOT Cover?
Most D&O insurance policies exclude coverage for:
- Fraud
- Illegal remuneration or personal profit
- Property damage and bodily harm
- Intentional non-compliant acts
- Fines and penalties
Make Sure Your Business is Covered with Additional Management Liability Coverage
Directors and officers insurance policies are one of many coverages that companies invest in for additional protection for their businesses and their executives. Other policies that should be considered as part of the full management liability program include:
- Employment Practices Liability Insurance (EPLI): EPLI protects businesses in the event of employment-related claims such as discrimination, wrongful termination, sexual harassment, retaliation, libel, defamation and invasion of privacy.
- Cyber Liability Insurance: Cyber liability insurance provides coverage for certain losses that are a result of a cyberattack or data breach. This type of policy will help companies comply with regulations that require a business to notify customers of a data breach involving personally identifiable information.
Directors & Officers Insurance Trends
Increased risks from social issues, cyberattacks and data protection laws brought
rates increases for D&O insurance policies in 2019, and this trend will continue. Data breaches and their potential aftermaths are one of the biggest risk exposures organizations can face in the new year. Executives could be held liable if their company’s confidential data, including clients’ personal information, is shared with the “outside world.”
Costs to resolve claims against directors are growing for both public and private organizations.
Experts predict that some larger, privately held companies and more complex organizations will have to obtain an “all-risk” D&O policy, which covers potential claims from shareholders, employees, creditors and customers.
Nonprofit D&O Insurance
Public companies, both big and small, are not the only ones that could be impacted dramatically by lawsuits against board members or executives. Nonprofit organizations also have unique risks that set them apart from small businesses. While they need coverage for property damage, personal injury, or
nonprofit workers’ compensation, they also need to protect their organization if a member of the executive team or board is accused of mismanagement of funds, breach of fiduciary duty or discrimination. These types of allegations could lead to lawsuits and settlements that could be extremely costly to a nonprofit organization.
D&O insurance for nonprofits covers the nonprofit organization, as well as any past, present and future directors, officers, committee members, trustees, employees and volunteers. The heirs, executors, administrators and legal representatives of an insured also would also covered in the event of an insured’s death, insolvency, or bankruptcy. D&O coverage will give
nonprofit organizations the risk management tools and professional help they need to handle allegations in a timely manner.
Directors and Officers Insurance from AmTrust Financial
AmTrust understands the unique risks that an executive team at a business or nonprofit faces. Our
nonprofit insurance coverages, including D&O insurance, are created with our client’s specific needs in mind. For more information about our range of insurance solutions, please
contact us today.
This material is for informational purposes only and is not legal or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.