Directors and Officers Liability Insurance
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Directors and Officers Liability Insurance (often called D&O) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization. Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. It 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. |
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Typical sources of claims include shareholders, shareholder-derivative
actions, customers, regulators, and competitors (for anti-trust or
unfair trade practice allegations). Directors and officers of a
corporation can be liable if they damage the corporation by breaching
their duties and contracts to the corporation, mix personal and business
assets, or fail to disclose conflicts of interest. In the United States,
however, corporations are often required by law, particularly state law,
to indemnify directors and officers in order to encourage people to take
the positions. Liabilities which aren't indemnified by the corporation
are covered by D&O insurance.[2] However, the policies have exclusions
and must be read carefully.
D&O insurance is usually purchased by the company itself, even when it
is for the sole benefit of directors and officers. Reasons for doing so
are many, but commonly would assist a company in attracting and
retaining directors. Where a country's legislation prevents the company
from purchasing the insurance, a premium split between the directors and
the company is often done, so as to demonstrate that the directors have
paid a portion of the premium.
A common misperception of D&O insurance is that it makes directors or
officers able to engage in acts they know to be wrong; this is not the
case. Intentionally illegal acts or any illegal gains/profits obtained
by directors/officers are not covered in D&O insurance; coverage would
only extend to "wrongful acts" as defined under the policy, which may
include certain acts, omissions, mistatements etc. while acting as a
director/officer of the organization. Exclusionary language, however,
would not provide coverage for fraud, illegal profits/gains, or
intentional/wanton illegal conduct by such director/officer (as
examples).
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