Directors & Liability Insurance: What Is It? Do I Need It?

Only large, publicly traded companies buy or need Directors & Officers (D&O) Liability Insurance. Smaller, privately owned businesses just don’t have the same level of exposure to create the need. The only potential claims, if any, would come from a disgruntled shareholder, if those even exist outside of the family. Right?

Wrong. These are common misconceptions that we hear when business owners decline D&O coverage. Did you know small businesses can actually be more vulnerable to legal expenses related to a D&O claim? Did you know lawsuits filed by shareholders represent only a portion of claims brought against directors and officers? Due to the nature of how small businesses are structured, executives are more involved in the day-to-day administration and operation of the business. Therefore, these individuals are often more at risk of being personally named in a lawsuit. These suits can come from a variety of parties, including, but not limited to: customers, employees, vendors, suppliers, competitors, government regulators, or investors. These lawsuits do not trigger coverage under your General Liability or Umbrella policies, and you will be held personally accountable. If you want to protect your estate and personal assets from claims arising out of your involvement in the company, you need D&O insurance. 

What Does D&O Liability Insurance Cover?

D&O liability insurance protects the personal assets of corporate directors and officers and their spouses in the unfortunate event that they are personally sued for actual or alleged wrongful acts while managing a company. 

This insurance will cover legal fees, settlements, and other related costs, while also protecting the company. Most companies provide a standard indemnification provision in their contracts, which holds officers harmless for losses due to their role in the company. D&O insurance is the financial backing of this provision. 

Why Should My Company Buy D&O? 

• To provide for the costs of a legal defense
• Access to the insurance carrier’s expert defense counsel, if policy is written on a duty to defend basis
• Attract and retain qualified officers and outside independent directors
• Attract and retain a qualified Board of Directors

What Is My Exposure? 

According to Chubb’s 2016 Private Company Risk Survey, more than one in four private companies experienced a D&O loss in the last three years. The average reported loss was $387,000, while the maximum reported loss was $17,000,000.* Claim allegations can be brought in many different forms, including: 

• Breach of Contract
• Deceptive Trade Practices
• Merger & Acquisition Decisions
• Inadequate Disclosure
• Misrepresentation in a Sale
• Breach of Fiduciary Duty
• Anti-Trust Violations Stock Dilution Fraud/Dishonesty
• Misuse of Company Funds
• Issues with a Failed Merger
• Unfair Trade/Trade Secrets (i.e. Hiring Competitor’s Employee)
• Business Interference
• Regulatory Actions Brought by Governmental Agencies such as FDA, FTC, SEC, or the IRS

How Do I Prevent D&O Claims From Occurring?

There is no way to prevent any claim from arising, but there are several ways to mitigate your risk. Here are some strategies and action items:

• Utilize contracts with third parties/clients/customers
• Prepare a written business continuity plan
• Prepare a written corporate governance program
• Execute procedures to avoid potential breaches of fiduciary duty
• Set up a succession plan
• Employ a specific risk management committee

How Do I Purchase D&O Liability Insurance?

Typically, you will need to provide an application, financials, and the company’s ownership structure. All policies are different and can be tailored to meet a company’s specific needs. Policy limits and coverage provisions should be reviewed on an annual basis. For more information or to proceed with a quote, contact your Swingle Collins advisor.

The descriptions of coverages listed in this article are brief and subject to the provisions, limitations, and exclusions that can only be expressed in your policy and related endorsements. For additional information of how Swingle Collins & Associates can assist in meeting your coverage needs, please contact your dedicated risk manager. The information contained in this article is provided for informational and educational purposes only. It contains general information on insurance issues and may not reflect the most current developments in insurance coverage and is unlikely to apply in all factual scenarios. The information does not include all the terms, coverages, exclusions, limitations or conditions that may be contained in the actual insurance contract language. The policies themselves must be read for those details. Sample policy forms will be made available upon reasonable request. Thank you.