Why Is D&O Insurance Important for Any Company?

Published on Mon, 01/22/2024 - 14:31
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Directors and officers (D&O) insurance provides valuable protection for publicly-traded companies. Few people would argue that this coverage isn’t prudent. However, what some people don’t realize is D&O insurance can also provide value to privately-held businesses and nonprofit organizations. Any company – including yours – can benefit from D&O insurance.

Understanding D&O Coverage

To understand why D&O insurance can help privately-held businesses and nonprofit organizations, it’s important to understand the types of protection it provides.

D&O is a type of commercial liability insurance that provides protection against claims involving the actions of directors and officers. D&O coverage can respond to shareholder lawsuits as well as lawsuits alleging leadership lapses, such as regulatory and compliance mistakes, overstepping authority, negligence, and omissions in meeting various duties. Shareholders, employees, customers, partners, and vendors may decide to file such lawsuits.

The Importance of D&O Coverage

Company leaders take on considerable responsibility. When things go wrong, they may be held personally liable. Indeed, it is not uncommon for lawsuits to name the individual directors and officers in addition to the company itself. When this happens, the individual’s personal assets may be at risk.

D&O insurance provides protection against this possibility. If the company cannot indemnify the director or officer named in the lawsuit, Side A of the policy provides coverage for the individual, which protects the individual’s assets. If the company does indemnify the director or officer named in the lawsuit, the policy reimburses the company, which protects the company’s assets.

As with all types of insurance, details and limits are subject to the terms of the policy. D&O policies are typically written on a claims-made basis, with some types of claims typically excluded. For example, D&O insurance does not typically provide coverage for claims alleging fraud. It also excludes claims involving bodily injury and property damage.

D&O Claims Examples

There are numerous scenarios in which D&O claims may occur against either privately-held or publicly-traded companies. Consider the following examples:

  • A food manufacturing company has not been complying with all relevant safety regulations. Discovery of the issue impacts both the company and its commercial clients. The clients file a lawsuit that names individual leaders at the company.
  • An accounting firm experiences a ransomware attack and subsequent data breach that exposes the personal information of both its clients and its employees. In the resulting investigation, it’s determined that the leaders at the company had failed to maintain several security protocols that could have prevented the breach. Those impacted by the breach file a lawsuit, which names the individuals responsible for the company’s cybersecurity.
  • A software company is seeking a lucrative contract with a major client. To secure the deal, one of the company leaders exaggerates the company’s capabilities, resources, and experience. The company is later unable to complete the contract, and the client realizes it has been misled. The client files a lawsuit, naming the individual who misrepresented the company’s capabilities.

Should Your Company Purchase D&O Insurance?

If you have dismissed D&O insurance simply because your company is not publicly traded or large, it’s time to rethink your decision. If you have leaders who could be named in a lawsuit, D&O insurance will provide valuable protection for:

  • The company. If your company indemnifies the individuals, the policy can reimburse the covered costs. This protects your company’s bottom line.
  • Your leaders. Company leaders must often make high-stakes decisions. Even if they do their best to follow company policies and adhere to relevant regulations, they may occasionally make a mistake. They may also face lawsuits over perceived derelictions of duty. By providing D&O coverage, your company is protecting its leadership. This can also help with recruitment, retention, and morale – if a lawsuit names an employee and the company does nothing to assist, consider how the other employees might react.

For many companies, D&O insurance is an important part of a corporate liability package. Heffernan Insurance Brokers can review your company’s current policies and make recommendations to help you close coverage gaps before a lawsuit occurs. Get in touch.