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D&O Insurance: Often Overlooked at a High Cost to Private Companies

D&O Insurance: Often Overlooked at a High Cost to Private Companies

April 18, 2018

By: Heather Galloway, CID Account Executive

You are a business owner of a company whose board of directors recently appointed a top-performing employee to lead the company as president. Once appointed, the company’s financial position declines, and a shareholder sues the board of directors alleging that these individuals used poor judgment and did not act in the best interest of the company when they appointed the new president. The lawsuit specifically names each individual on the board. Now what? Will your company pay for the legal expenses of each individual? Can your company’s balance sheet take that kind of hit? If you are a director or officer of this company, your assets are at stake – will your company protect you?

This has been the unfortunate reality for many business owners. The aforementioned scenario is an actual case published by Travelers Insurance Library of Claims. It settled for $1.5 million plus an additional $150,000 in attorney fees. This example is not a fear-mongering claims scenario, but rather a realistic example of how a company can experience a substantial financial loss due to the actions of their directors and officers.

So what happens if someone alleges that one of your directors or officers is responsible for…

  • misuse of company funds?
  • failure to comply with workplace laws?
  • fraud?
  • negligence allowing unauthorized access to and misuse of personal information?

Directors and Officers Liability, commonly referred to as D&O Insurance, helps to fill in the gaps where traditional GL policies typically exclude financial loss. Unfortunately, D&O Insurance is often an overlooked coverage for most private companies.

Common myths business owners believe about D&O coverage:

  • Only large, publicly-traded companies have an exposure due to potential securities litigation from shareholders
  • A D&O claim or suit will never happen with my company because of our industry type or ownership structure

In actuality, the data shows that 1 in 5 companies with fewer than 50 employees will experience a D&O lawsuit. Every business has an exposure to D&O loss. The actions of corporate boards, advisory committees, and corporate officers create opportunities for a potential lawsuit and, therefore, a responsibility to protect both the company and the directors and officers. Many companies discover they have a gap in insurance coverage too late once a claim has already occurred. To understand the significance of D&O coverage it is important to cover the basics. The chart below helps to break down the D&O Insurance policy in an easily digestible format:

Coverage / Description

  • Side A Coverage: Protection for the individual directors and officers should indemnification from the company become unavailable for legal reasons or bankruptcy
  • Side B Coverage: Protection for the company as reimbursement for the costs of indemnification and legal fee advancement
  • Side C Coverage: Protection for a public company as it relates to securities claims

While there are basic components of a D&O policy, there are no standard forms or definitions across D&O insurance carriers. Exclusions can vary from one carrier to another and can be incredibly restrictive. According to policy language, the carrier may have the right to select legal counsel and provide payment up front. Other policies require carrier approval of your choice of attorney and only provide reimbursement of your advanced legal expenses. Defense and attorney costs are typically contained within the limit of insurance provided, which reduces the amount of coverage available to pay any potential settlements. These variances between forms tend to leave business owners overwhelmed, opting to avoid the coverage discussion altogether.

While D&O Insurance is often difficult to navigate, the financial future of your company depends on it. The most effective way to ensure that you have accurate coverage when considering D&O Insurance is to discuss further with your trusted insurance broker. At Thomas McGee Group we advise businesses on risk management and risk finance solutions that are customized to protect their people and their balance sheet. Our familiarity with the contractual language and forms in a D&O policy help to better-negotiate comprehensive coverage on your behalf. Call us, and choose today to better protect your company and protect against high-dollar losses that could cost you everything.

Category: Commercial Insurance Brokerage