What is Directors and Officers Liability Insurance?
Directors and Officers (D&O) Liability Insurance covers the directors and officers for personal liability arising from their management of an organization. It aims to protect the directors’ and officers’ personal assets when they are alleged to have made poor actions or decisions. This insurance is important since directors and officers, no matter how prudent they are, may implement decisions that adversely affect shareholders, trading partners, competitors, suppliers, customers, or employees. And anyone from these groups of people may file a suit against the directors and officers of the organization.
This insurance may cover the following:
- Past, present, and future directors and officers of the organization
- Position being held at the time the act was committed
- Directors and Officers of the company and its subsidiaries (except for subsidiaries with a separate cover)
- Directors in affiliate companies but only those representing the interest of the insured company and its subsidiaries; does not cover directors of other shareholders
- Retired directors cover in case of non-renewal or non-replacement of policy
This D&O Liability Insurance is not only applicable to companies but also to foundations and associations.
What are the benefits of D&O Liability Insurance?
For the directors and officers of the organization, the main advantage of having this kind of insurance is the protection of their personal assets. The following are the losses that will be covered by the D&O Liability policy:
- Damages awarded or judgments entered
- Settlements negotiated with the insurer’s consent
- Legal cost and expenses awarded vs. the insured but only in connection with a judgment which is covered in accordance with the policy terms
- Defense cost (including defense cost for employment-related/labor cases)
However, apart from the monetary coverage, D&O Liability provides peace of mind to directors and officers. Individuals at this level decide for the future of an entire organization which means they are taking on a lot of risk. Without the assurance that the company will back them up whenever important decisions do not go as planned, directors and officers might shy away from making big and risky decisions which could have been beneficial for the organization.
With this, having a D&O Liability insurance doesn’t only benefit the directors and officers but the organization as well. Because the directors and officers are assured that the organization will provide for them when stakeholders filed a case against them, they will be less distressed in making risky decisions. In these digital times, companies need to continually innovate themselves to stay relevant, and most of the time, innovations are not easy to plan and execute. So, it is indeed in the benefit of the organization if the directors and officers can make risky but valuable undertakings.
Another benefit of having D&O Liability insurance is that the organization will attract qualified directors and officers. This is primarily important for foundations and associations where benefits for directors and officers are less generous compared to private companies or could be even none existing at all. Having the D&O Liability insurance is a much-needed benefit for the individuals who will be taking on a lot of risk without so much to receive in monetary value as a return.
How does D&O Liability Insurance work?
When a charge is filed against the director or officer, the organization should contact its insurance broker or provider to inform the latter about the claim. The organization should also provide a report containing the details of the charge. The insurance broker or provider will assess if the claim is covered by the existing D&O Liability insurance policy of the organization. The claim might fall into three categories: administrative, civil, or criminal. For administrative, the defense cost is covered considering that there is no wrongful act but an inquiry is conducted (such as inquiries conducted by government agencies). For civil, both defense cost and award of damages are covered regardless of the outcome of the case. For criminal, the insurance provider will cover the defense cost; however, if the director or officer is convicted at the end of the case, the defense cost should be returned to the insurance provider as criminal acts cannot be insured.
For clarity, D&O Liability Insurance only covers the liability of the director and officer of the organization and not the organization’s liability (please refer to Casualty and Liability Insurance or Product Recall and Contamination Insurance for more information on this).
With this, we at Trinity hope that the above information helps you understand the benefits and importance of Directors and Officers Liability Insurance. In this digital age, it is essential for organizations to continually adapt to stay relevant, and we believe that by providing you with new products such as D&O Liability Insurance, we can help your organization achieve its goals.
- Allianz - https://www.agcs.allianz.com/news-and-insights/expert-risk-articles/d-o-insurance-explained.html