Directors and Officers Liability Insurance Explained

Directors & Officers Liability provides financial protection for the directors and officers of your company in the event they are sued in conjunction with the performance of their duties as they relate to the company. Think of Directors & Officers Liability as a management Errors and Omissions policy.

Directors and Officers Liability can usually include Employment Practices Liability and sometimes Fiduciary Liability. The former involves harassment and discrimination suits, and is where the majority of your exposure will be.

Directors and Officers Liability is often confused with Errors & Omissions Liability. The two are not synonymous; Errors & Omissions is concerned with performance failures and negligence with respect to your products and services, not the performance and duties of management. Generally it is a good idea to carry both policies.

When you assemble a board of directors, they will frequently make the requirement.

Investors, especially Venture Capitalists, will also usually require that you show evidence of Directors and Officers Liability insurance as part of the conditions of funding your company. If an IPO is planned, D&O coverage will be crucial because claims can arise if stock performance is not as buyers had been led to expect.

Hiring employees opens management up to employment practices lawsuits.

First, claims from stockholders, employees, and clients will be made against the company, AND against the directors of the company. Since a director can be held personally responsible for acts of the company, most directors and officers will demand to be protected rather than put their personal assets at stake.

Second, investors and members of your board of directors will not be willing to risk their personal assets to serve as a corporate director or officer, no matter how heartfelt their belief in your company.

Last, employment practices suits constitute the single largest area of claim activity under D&O policies. Over 50% of D&O claims are employment practices related.

• Mismanagement of operations or company assets
• Self-dealing and conflicts of interest
• Misrepresentation during the sale of company assets
• Misrepresentation in a private placement prospectus
• Acts beyond authority granted in by-laws
• Violation of certain state and federal laws
• Breach of fiduciary duties

Each of these types of litigation can last several years, becoming a financial burden and a continuous drain to a private company's profit margin. Indemnification from the company is a protection for its directors, officers and employees, but, sometimes it's not enough. If a company cannot indemnify its directors, officers or employees, either because of the allegations of a lawsuit or as a result of the company's insolvency, then this financial burden can become the personal responsibility of the company's directors, officers or employees.