What is directors and officers insurance?
D&O insurance protects the interests of a company and those that oversee its important decision-making, providing funds to pay for legal fees, including investigation and extradition costs, as well as court-issued settlements, and other litigation costs. It also holds the resources for standard indemnification provisions, keeping a commercial officer or director, as well as his or her spouse, from being held personally responsible for losses that take place. Any lawsuit alleging breach of fiduciary duty, misuse of company funds, misrepresentation of company assets, fraud, theft of intellectual property, or lack of governance is generally included in the coverage, whether the claim was actually or allegedly wrongful. It does not typically cover illegal acts or claims of illegal profits. Someone who might sue a director or officer could include investors, vendors, employees, customers, competitors, and a variety of other individuals.
D&O insurance is comprised of three separate core coverages called Side A, Side B, and Side C:
- Side A covers claims against directors and officers not indemnified by the company
- Side B reimburses the company when it does indemnify officers and directors
- Side C, which is sometimes called entity coverage, provides coverage for loss to publicly traded companies for securities claims and for all risks of privately held and not-for-profit companies unless specifically excluded.
Synonyms for directors and officers insurance
There are some instances when you might hear directors and officers insurance referred to as something else. While there’s not much difference between them, you should know about the following synonym:
- Directors and Officers Liability Insurance: You might hear someone refer to this insurance coverage as directors and officers liability insurance. Adding “liability” to the item ensures individuals understand what type of coverage it is.
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When do I need to be aware of directors and officers insurance?
Claims for alleged or actual wrongful acts against a director or officer are quite serious. D&O insurance covers many of the most common claims:
- D&O insurance provides dual coverage, protecting against personal and company losses.
- Policies can be written to address specific risks, with many insurers excluding protection in instances of illegal profits, criminal activity, or fraud.
- Unlike a CGL policy (which often includes defense costs in addition to listed policy limits), D&O insurance includes defense costs within the policy limits, which means that defense costs erode the overall policy limit; this is called erosion of limits.
- Insurers may avoid paying out on a policy if the company has been found to misrepresent or misconstrue important information.
- Officers and directors who fail to comply with the laws in the workplace, or allegedly do so, are often sued by coworkers and employees.
- The breach of fiduciary duties is one of the more common claims against officers and directors because it often results in bankruptcy or other financial losses for everyone involved.
- The misuse of company funds often leads to more serious financial issues, as well as deeper dishonesty in the workplace, but when someone files a claim against an officer or director for this type of misuse, directors and officers insurance can help.
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