Directors and Officers Liability Insurance

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What is D&O Insurance?

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During these increasingly litigious and volatile times, bearing in mind that public, private and non-profit companies face complex exposures, company’s senior leadership may be targets of financially damaging lawsuits. Decisions and judgments made by management are constantly scrutinized and from a broader range of parties than just shareholders, such as regulators, other governmental authorities, competitors, customers, suppliers and creditors. D&O insurance offers executives' personal liability and financial loss protection from wrongful acts committed – or allegedly committed – as corporate officers or independent directors. D&O insurance also offers balance sheet protection to the corporation.

Why is D&O Insurance Important?

D&O insurance plays an important role for companies looking to attract and retain a top management team in an environment where heightened risk and increased oversight are part of corporate life. Lawsuits companies and their directors and officers can disrupt business, damage reputations, and be financially devastating. Purchasing D&O insurance will not prevent claims from happening. However, D&O insurance should be viewed as one of the necessary components of corporate governance and risk management.
Events that can trigger D&O litigation are also broad. From cyber-related losses, to financial disclosures, to the response to pandemics and natural disasters, organizations and management teams face a growing list of liability exposures — across all industries.
D&O liability insurance is an effective way to protect your organization and your directors' and officers' personal assets. Additionally, D&O insurance is especially important for public and private companies preparing for a transformational event like an initial public offering (IPO). Publicly traded companies are often viewed as riskier than private companies due to the potential exposure to possible shareholder class action claims. Public companies have heightened financial and public disclosure reporting requirements, increasing exposure to shareholder claims.

 

What Does D&O Insurance Cover?

During these increasingly litigious and volatile times, bearing in mind that public, private and non-profit companies face complex exposures, company’s senior leadership may be targets of financially damaging lawsuits. Decisions and judgments made by management are constantly scrutinized and from a broader range of parties than just shareholders, such as regulators, other governmental authorities, competitors, customers, suppliers and creditors. Directors’ and officers’ (D&O) insurance offers executives' personal liability and financial loss protection from wrongful acts committed – or allegedly committed – as corporate officers or independent directors. D&O insurance also offers balance sheet protection to the corporation.

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Who can be insured

Directors:

  • Members of board of directors
  • Non-executive (independent) directors
  • Directors of subsidiaries
  • Outside entity directors
  • Past directors and officers

Officers:

  • Collective executive body (management board)
  • Sole executive body
  • Heads of the Company's structural divisions
 

Company:

  • Securities claims only
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Policy structure

A D&O insurance policy typically provides coverage under three sections, often referred to as "sides":

  • Side A or Material interests of insured persons: the policy provides coverage for claims made against directors and officers for wrongful acts and indemnity is paid directly to or on behalf of insured person (director, officer, etc.). Side A can be seen as financial protection for directors. Often this coverage is triggered if the company is unable to indemnify. This is the essential form of D&O insurance for directors that can be critical to attracting qualified management.

  • Side B or Company Reimbursement Coverage: this cover reimburses the company for the costs of indemnifying directors and officers, such as legal defence costs, settlements or judgments.

  • Side C or Securities claim against the company: can be also called Entity Coverage, offers balance sheet protection when the company is named in litigation. This is generally limited to securities claims for public companies.

The exact coverage that a company goes with ultimately depends on its unique business model characteristics, needs, history, and financial picture.

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Who needs D&O:
  • Medium and large business companies*
  • Public companies, especially during public offerings
  • Companies with foreign assets
  • Companies with a large number of subsidiaries (subsidiaries are covered automatically)
  • Companies where M&A is planned
  • Companies, the board of directors of which includes independent directors, as well as representatives of foreign investors

* It should be mentioned, that small businesses aren't immune to costly lawsuits. Small companies might be uniquely vulnerable to a potentially damaging lawsuit because they don't have the financial muscle that larger companies may have.

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Wrongful acts of the D’s and O’s:
  • Poor quality of the decisions / lack of due diligence when making decisions
  • Poor management or control
  • Excess of authority
  • Wrongful acts in connection with M&A deals
  • Errors, omissions and incomplete disclosure in the financial statements, investment returns and prospectuses
  • Misuse of information or copyright
  • Wasteful spending

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