What is Directors and Officers Liability Insurance (D&O)?

Directors and officers (D&O) liability insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization. It can also cover the legal fees and other costs the organization may incur as a result of such a suit.

Directors and officers liability insurance is akin to corporate governance, corporate law, and the fiduciary duty owed to stakeholders, such as shareholders and beneficiaries. US federal law grants directors and officers broad discretion in their business activities. Corporate law is typically handled at the state level. Publicly traded companies are subject to more federal regulation than privately held companies, particularly due to the Securities Act of 1933 and the Securities Exchange Act of 1934.

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Insurance

Key Takeaways

  • Directors and officers (D&O) liability insurance covers directors and officers and/or their company or organization if sued.
  • D & O insurance claims are paid to cover losses associated with the lawsuit, including legal defense fees.
  • Most policies exclude fraud and criminal offenses.

Understanding Directors and Officers Liability Insurance (D&O)

Directors and officers liability insurance applies to anyone who serves as a director or an officer of a for-profit business or nonprofit organization. A directors and officers liability policy insures against personal losses, and it can also help reimburse a business or nonprofit for the legal fees or other costs incurred in defending such individuals against lawsuits.

Directors and officers liability insurance claims are paid to directors and officers of a company or organization for losses or reimbursement of defense costs if legal action is brought against them. Such coverage can also extend to criminal and regulatory investigations or trial defense costs. Civil and criminal actions are often brought against directors and officers simultaneously. 

D&O insurance has become closely associated with broader management liability insurance, which covers liabilities of the corporation, as well as the personal liabilities for the directors and officers of the corporation.

Special Considerations

D&O policies can take different forms, depending on the nature of the organization and the risks it faces. It’s best to seek out an insurance company with deep experience in this specialized field. The policies are generally purchased by the organization to cover a group of individuals rather than by the individuals themselves.

If a company fails to disclose material information or willfully provides inaccurate information, the insurer may avoid payment due to misrepresentation. The "severability clause" in the policy conditions may be intended to protect against this by preventing misconduct by one insured from affecting insurance for other insureds; however, in certain jurisdictions, it may be ineffective.

Policies can be written to insure against a variety of hazards, but they generally make exclusions for fraud, criminal activity, and illegal profits. Also, most policies contain "insured vs. insured" clauses, whereby no claim is paid when current or former directors and officers sue the company. This prevents the company from profiting from deceit or conspiracy.