What is Directors And Officers Liability Insurance
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 (see How to Protect Your Assets from a Lawsuit or Creditors). It can also cover the legal fees and other costs the organization may incur as a result of such a suit.
BREAKING DOWN Directors And Officers Liability Insurance
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 a lawsuit.
Directors and officers liability insurance is paid to directors and officers of a company, or to the organization(s) itself, for losses or reimbursement of defense costs if a legal action is brought against them. Such coverage can also extend to criminal and regulatory investigations/trials 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 itself as well as the personal liabilities for the directors and officers of the corporation.
D&O policies can take different forms, depending on the nature of the organization and the risks it faces, so 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 or other criminal activity.
Background of Directors and Officers Liability Insurance
Directors and officers liability insurance is closely related to corporate governance, corporations law, and the fiduciary duty owed to shareholders or other beneficiaries. U.S. federal law gives directors and officers are granted 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.