Small Business Insurance

Directors and Officers Insurance

Do you need Director and Officers insurance? As your business grows and you appoint officers and bring in outside directors, your leaders and advisors may ask for liability protection. Here's everything you need to know about D&O insurance.

In theory, directors' and officers' insurance exists for one reason only - to protect the directors and officers of a business in the event they are sued for their actions while employed with the company.

However, in practice many directors' and officers' insurance policies are limited in their ability to provide the protection they promise.

In most cases, directors' and officers' insurance (D&O) is purchased by the company as a way of retaining directors and other upper-level leaders. The people in these positions require some form of coverage since claims initiated by shareholders, customers, regulators, and even competitors often name individual decision-makers as well as the company itself.

Although D&O insurance can be a good deal for the company's leaders, recent high dollar payouts have left D&O providers reeling and searching for ways to limit their liability. As a consequence, many D&O policies contain features that are less than optimal for individual directors and officers. Here are just some of the things you need to know in order to find a policy that works for you and your business...

Shared Liability

In an effort to limit their own liability, some D&O insurance providers have extended their coverage to include not only individual directors and officers, but the company itself. The net result is bad news for the organization's leaders because under this arrangement they are forced to share the policy's limits with the business itself. In other words, if both the company and its officers are named in a lawsuit, the officers' coverage may be reduced to accommodate the business' general liability.

The allocation of the coverage can become contentious, injecting even more conflict into an already tense situation. For your own protection, make sure you thoroughly understand who is covered under a shared liability policy and try to keep the list as small as possible.

Individual Policies

Fortunately, if your D&O policy contains a shared liability clause you can still provide coverage for yourself, your directors, and your officers. You could accomplish this by purchasing a policy with higher liability limits. But a more reliable option is to purchase individual policies for yourself, your directors, and your officers. Even though you will probably end up paying more for coverage, the end result will be guaranteed security for the people most vulnerable to civil action.

Policy Security

Something else to consider is the fact that many D&O providers now retain the option of voiding a policy if a single officer or director provides falsifies information or omits important information on the application. That means you could find yourself without coverage through absolutely no fault of your own. Sometimes it is possible to negotiate the removal of this clause in your policy, but at a minimum you should talk to your provider about ways to protect the company - and yourself - from someone else's shortcoming.

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