Ultimate Guide To Directors and Officers Insurance

As a member of your board of directors, you may be personally responsible for covering legal fees if you face a lawsuit or formal investigation. Business leaders faces unprecedented scrutiny and liability exposure which have become an essential in today’s complex business environment. In this guide, we’ll explore why D&O liability insurance is essential for anyone serving in a leadership capacity. 

What is Directors and Officers Insurance? 

Directors and Officers (D&O) insurance protects the leaders and executives of an organisation from financial losses due to lawsuits alleging mismanagement, negligence or breaches of duty. Determining the right coverage limits while balancing protecting your leadership team and cost effectiveness is crucial.  

Why Do You Need D&O Insurance? 

Many organisational leaders mistakenly believe that a lawsuit will completely protect them from personal liability through the corporation. While some level of protection exists, there are significant limitations beyond the company's structure. 

Directors and officers may be personally liable for their actions within a corporate setting, as claimants often name individual members rather than the company itself in lawsuits. 

Corporate indemnification does provide financial protection but it does have limits and may not apply to all situations. For example, corporate indemnification does not cover illegal, fraudulent or criminal activity.  

Coverage Options in Directors and Officers Insurance 

Directors and Officers (D&O) insurance typically has three coverage components: Side A, Side B, Side C and Corporate Legal Liability.

Side A: Non-Indemnifiable Loss 

In the situation that the company cannot or will not indemnify its directors and officers for the claim due to legal prohibitions or financial insolvency, D&O liability insurance will cover their legal fees and potential liability expenses.  

Scenario 1 

Company declares bankruptcy and falls under the bankruptcy protection which means the company do not have the financial means to indemnify their own directors.  

In this situation, the D&O liability insurance will cover the directors for the legal expenses and claims made against them 

Side B: Indemnifiable Loss 

When directors and officers are sued for actions taken while performing their duties, the company may legally indemnify them by covering their legal costs and any resulting settlements. Instead of the company bearing the legal and other outstanding financial costs on their own, the Side B coverage will reimburses the company with the expenses incurred during the lawsuit.  

Scenario 2 

Company decides to cover the director for the expenses incurred from the lawsuit that led to financial losses. 

Side B coverage activates, allowing the company to file a claim with its D&O insurance to recover the expenses incurred. 

The insurer processes the claim and reimburses the company for legal expenses, reducing its financial burden. 

Side C: Securities Entity Coverage 

This business insurance coverage protects public listed companies when it is named as a defendant in a lawsuit alongside its directors and officers, covering its legal liabilities. Since legal fees in such cases can be substantial, having strong coverage is essential to manage these expenses. 

Scenario 3 

A group of shareholders files a lawsuit against the publicly traded company for actions that led to a decline in stock prices. Actions such as misleading financial statements, fraud, or insider trading fall under this category. 

Side C coverage kicks in here, providing protection for the company itself against the legal costs associated with the lawsuit.  

Corporate Legal Liability (Entity Cover) 

Although standard D&O liability insurance typically protects individual directors and officers, corporate legal liability (entity cover) offers financial protection to private companies against losses resulting from claims made against the company, which extend beyond just securities issues.  

Scenario 4 

Company faces lawsuit due to the breach of contract lawsuit filed by a major supplier.  

With the corporate legal liability coverage in place, the insurer will cover for legal defence costs, settlements or any court-awarded damages, up to the policy limits.  

Directors and Officers (D&O) insurance has traditionally been more common among large multinational corporations (MNCs). However, many small and medium-sized enterprises (SMEs) assume they are too small to need such coverage. In reality, lawsuits can be financially draining for businesses of any size, and D&O insurance can be customized to suit both MNCs and SMEs. 

If you’re looking for directors and officers insurance, you can work with insurance broker like eazy to find the best insurance to fit your business’ needs. Alternatively, contact us today for personalised advice tailored to your business’s specific needs and we will be happy to assist you.