In the past century, our financial landscape has seen ebbs and flows bring about large growth and increased wealth to businesses as well as the crumbling of giant corporations. Lapses in judgment, market instability, and international relations are just a few of the contributing factors to the volatile areas of business and finance. Directors and Officers Liability Insurance (D&O) provides a sense of security to protect individuals, organizations, and large corporations from legal action.

The Cost of D&O Insurance

D&O Insurance provides invaluable peace of mind, but what about the cost? As with other, more traditional insurance policies, the cost includes both a yearly or monthly premium and a deductible, which is an out of pocket cost before a claim is paid. The higher the deductible, the lower the premium. Another factor in determining cost is the risk value placed on the company. Lower risk businesses could pay as little as $250 a year for $1 million in coverage, while companies with a higher risk might pay more than $10,000 a year. However, the average cost of Directors and Officers Insurance is around $600 for $1 million in coverage. Similarly, the number of employees and operational costs factor into determining the costs of individual policies.

What Is D&O and Who Needs It?

Directors and Officers Liability Insurance by definition is optional supplemental coverage meant to protect individuals from financial liability in the event of adverse business practices. Previously seen as beneficial to only large corporations and publicly traded entities, small businesses now find it profitable to invest in this security.

Corporate leaders, business owners, and directors and officers are part of the infrastructure of any successful venture. They are held to a standard of conduct when handling their scope of practice, which is known as fiduciary duty. This holds them accountable to act in the best interest of their company and clients. Breaches of this code of conduct include cases of bankruptcy, employee piracy, and employment practices liability.

Typically purchased as a supplemental coverage, D&O Insurance offsets the costs of defense, settlement payouts, and strategies of defense unless found guilty of a crime. Many executives require D&O coverage as grounds for employment. By the same token, many investors expect this coverage before accepting proposals.

The Double Whammy…

One day, Carrie complained to her boss, Tyler, a top director and her direct manager, that she was continually sexually harassed by a co-worker named Billy.

Tyler knew this matter needed immediate attention, but he was overwhelmed with work and never looked into the matter. Two months passed, and Tyler still did not follow up on the sexual harassment allegations. Carrie wrote a letter and put it on Tyler’s desk, outlining all the instances where Billy made her feel uncomfortable and threatened her. Two more weeks went by, and Tyler meant to investigate but was sidetracked. Carrie quit and sued Tyler for allowing sexual harassment and not taking action once notified in writing.

With legal papers in hand, Tyler investigated the sexual harassment allegations from Carrie. After the three-week investigation, he found incriminating evidence that Billy sexually harassed Carrie multiple times. Very upset with the findings, Tyler fired Billy. When Tyler thought the ordeal was over, Carrie served the organization legal papers.

To compound the situation, Billy sued Tyler and the organization, claiming he was wrongfully terminated. This is a real scenario that often plays out in the corporate world.

What Does D&0 Insurance Cover?

A CEO of a large corporation chooses to sue the company for wrongful termination, slander, and the hindrance of further gainful employment after he is fired by the Board of Directors. The investigation, defense, and associated court fees could easily bury a business. With D&O coverage, the Board of Directors and associated officers are not held personally liable for the losses.

As with any other insurance coverage, the premium paid to the insurance company provides coverage and pays for claims, minus the deductible. This ensures the personal assets of the involved parties are not at stake. Public companies, as defined by having securities traded under the National Securities Exchange, receive the greatest benefit from D&O coverage.

Three clauses provide coverages under the following parameters:

• SIDE-A: Provides coverage to those directors and officers on an individual level when the corporation does not have the means to do so. The exclusions in this clause are a refusal to pay legal defense, loss of a director or officer, or bankruptcy prohibiting such indemnification.
• SIDE-B: Coverage for the corporation itself when the directors and officers are indemnified, also known as corporate reimbursement.
• SIDE-C: Protects the corporation or organization from what is known as securities claims. These only apply to publicly traded and larger privately owned companies. A lesser-known Broad Form Side-A Difference in Conditions (DIC) provides wider spectrum coverage as well as filling in the gaps from other, more traditional policies.

The responsibility shouldered by executives is far reaching. Employees, contractors, vendors, and clients depend on the integrity of the directors and officers. Of course, the liability for breaches of this moral code falls on their shoulders as well, regardless of the origin of the offense. The coverage provided by D&O Insurance policies is specifically tailored to these situations, which includes but is not limited to:

• Wrongful Acts: This is a breach of legal obligation a director or officer has to the organization. These wrongdoings often end in a civil suit and include immoral, antisocial, and illegal acts.
• Child Molestation: In cases of this atrocity, D&O Insurance protects those not guilty, legally and financially.
• Discrimination: A bias against any defining personal choice made by an individual and their right to exercise that freely, so long as it does not bring harm to another. Other examples of discrimination include favoring or accepting gifts for gain.
• Embezzlement: It is when a company employee purposely withholds assets for the sole reason of converting it into a personal gain. For example, an employee takes very small amounts of assets from their place of business. So small, it's hardly noticeable. However, they do this over a long period, accumulating what does not belong to them. This is financial fraud and comes with jail time.
• Misuse the organization’s funds: We live in a litigious society. It only takes one questionable decision from a director or officer with company funds to have an allegation brought against them. More times than not, even if the director or officer is found to have done nothing wrong, the cost of hiring a law firm can be enough to put most businesses in financial restraints for years.
• Mistreating an employee: Guilty or not guilty, if a director or officer of a corporation is found to have wrongfully terminated someone, discriminated against them, or sexually harassed an employee or coworker, the D&O policy can help cover the cost associated with the allegations.
• Failure to perform official duties: If litigation is brought against a business, for real or perceived failure, to carry out the functions of that position, then D&O Insurance can help.

Which Claims are Most Common?

In the United States, the most common lawsuits filed by employees and former employees are wrongful termination. In fact, 60% of D&O filings in this country are a result of these claims on the part of ex-employees.

In short, the coverage provided by D&O Insurance ensures that the innocent do not pay emotionally or financially from one’s own or another’s mistake at the cost of the entire organization.

What D&O Does NOT Cover and Coverage Limits

As with any insurance policy, D&O Insurance has exceptions, particularly in the cases of intent. If there is malicious or intentional illegal action taken, e.g., embezzlement, intentional personal gain, or fraudulent activity, the policy will not provide coverage. Knowledge can also be considered an act of accountability, whether the individual or company actually participated in the act. D&O Insurance provides coverage from the first report of a breach and is paid retroactively, if applicable.

The coverage does not take away the personal accountability for moral fortitude, which lies in the individual. However, those affected by the “cost of doing business” can rest at ease that their needs and rights will be upheld. Directors and officers of said business ventures may also find peace in knowing that should such a violation occur, they can satisfy their fiduciary duties.