D&O Insurance, or Directors and Officers Liability Insurance, is often thought of as only being purchased by large public companies. But private companies large and small should consider this important coverage for their firms too.
What Does D&O Insurance Cover?
When we hear “liability” we probably are thinking about being sued for claims when someone gets injured or suffers a bodily injury. Unlike General Liability Insurance, D&O Insurance actually excludes claims arising from bodily injury or property damage and focuses on protecting your company’s decision makers from suits alleging “wrongful acts”. Wrongful acts can be decisions or statements which are made that are misleading, inaccurate; or any act, failure to act, or error; or a breach of duty. As you can see those are pretty broad swaths of potential allegations that could be made against company leaders. While many of the claims against corporate directors and officers in public companies arise from securities litigation, private companies fact litigation from vendors, customers, competitors, regulators, employees, and creditors.
There Are Several Key Issues Why You Should Consider D&O Insurance:
- Suits against corporate officers are made against them personally. Their personal assets are at stake for the decisions and actions they take in your company. If you have a board of directors, many decision makers will not consider sitting on your board unless you do have coverage.
- If you’re a startup and have investors, you are particularly vulnerable. Your investors have expectations based on your pitch, statements, and supporting documents. If you fail to meet the obligations of your financing arrangements there could be trouble.
- Suits can be expensive – even if groundless, the defense costs associated with a D&O action can run into the hundreds of thousands of dollars.
- Claims for D&O actions are not covered elsewhere. Your general liability and umbrella policies narrow the scope of coverage to claims arising from bodily injury, property damage, and personal injury which does not include the types of allegations found in a D&O action.
- It’s not that expensive. Depending on the size of your business, D&O insurance can be surprisingly affordable. For small firms it may only be $1,500 a year!
Here Are A Few Actual Claim Examples of D&O Insurance In Action:
A company recruited a top sales executive away from a competitor. The competitor sued the company, alleging that it had interfered with the competitor’s contractual relationship with its employee. The defense expenses associated with this claim were in excess of $250,000 and the actual award to the competitor was $600,000. The total claim exceeded $850,000!
A retailer advised one of its suppliers that it was expecting their business to grow significantly so they wanted to supplier to increase its inventory to meet future demands. The supplier did so, but the retailer switched suppliers mid-stream, leaving the supplier with excess inventory. The supplier sued the retailer alleging that he relied on their promises of more business, and suffered significant financial damages when that business didn’t materialize. Final defense costs and settlement exceeded $500,000!
One last point….. D&O Insurance is one part of the suite of Management Liability Coverage. Other parts include: Employment Practice Liability (EPLI), Fiduciary Liability, Commercial Crime Insurance, Kidnap, Ransom & Extortion coverage, and Cyber Liability. These coverage parts can be purchased separately or in unison with your D&O Coverage.
Have questions or issues you’d like to discuss further? Give us a call in New York, we’d be happy to talk through your issues with you.