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In a nutshell
D&O insurance protects a company’s leadership or the company itself if a customer, employee, investor, vendor, or another party sues them.
- D&O insurance provides protection for company officers against legal claims that result from their decisions acting in the capacity as leaders of the company.
- Coverage is usually for current and past officers.
- This insurance covers both legal fees incurred by the companies and its officers as well as any monetary damages, settlements, and awards that result.
Company and organization leaders are charged with making critical decisions and setting the strategic direction of a business. While they may have the best intentions during the decision-making process, their actions could expose them to the risk of litigation. Fortunately, business insurance, including directors and officers (D&O) coverage, can help guard against financial loss and other legal consequences.
But as with other types of insurance, D&O insurance doesn’t cover everything. Here’s how it works, what it covers and doesn’t cover, the types of protection available, and more.
How does D&O insurance work?
D&O insurance protects company and organization leaders from personal losses in the event of a lawsuit. It can also protect the company or organization directly, compensating it for legal costs related to a lawsuit, including attorney fees and settlements.
What does D&O liability insurance cover?
D&O liability coverage could protect your leadership team and business or organization from common risks, including the following allegations:
- Mismanagement or misrepresentation of company funds.
- Failure to abide by employment laws.
- Securities regulation violations.
- Investment decisions resulting in losses.
- Copyright infringement.
- Intellectual property theft.
What does D&O liability insurance not cover?
While D&O liability insurance can provide valuable protection, it doesn’t cover everything. Here are some scenarios that generally won’t be covered:
- Fraud.
- Theft.
- Embezzlement.
- Property damage.
- Bodily injury.
- Prior litigation.
In addition to the above scenarios, D&O insurance often comes with common exclusions. For instance, if a company officer sues another company officer that’s covered by the same policy, your D&O insurance likely won’t cover associated costs. It’s essential to understand potential exclusions before purchasing D&O coverage.
Types of D&O liability insurance
There are three categories of D&O liability insurance,, including side A, B, and C coverage. These coverages are often grouped together to provide comprehensive protection.
| Coverage type | Who/what it protects | How it protects |
|---|---|---|
Side A: Non-indemnifiable loss | Individual company or organization leader | Protects an individual’s personal assets if a company cannot or will not pay for a loss |
Side B: Indemnifiable loss | Company or organization itself | Protects the company or organization itself if an individual director or officer is sued and subject to financial loss |
Side C: Corporate entity | Company or organization itself | Protects the company or organization if the entity itself is sued and subject to financial loss |
How much does D&O insurance cost?
D&O insurance varies in cost based on your company or organization’s industry, revenue, debt, entity type, and the coverage limits you choose. Generally, larger companies in higher-risk industries with high coverage limits will pay more for D&O coverage. Smaller nonprofits that require less coverage will likely have lower premiums.
A recent report from insurance marketplace InsureOn estimates that small businesses pay around $1,653 for D&O coverage each year. Still, businesses in certain industries may pay considerably more on average, with manufacturing companies paying around $7,152 annually.
When should you get D&O coverage?
If your business or its directors and officers are at risk of being sued by an employee, customer, vendor, or another individual, purchasing D&O coverage could make sense. Commercial lawsuits can be very expensive, often ranging from tens to hundreds of thousands of dollars. Thus, annual premiums for D&O insurance can be a relatively small price to pay.
When determining whether D&O coverage makes sense for your business, consider your industry and its potential risks, as well as other factors, such as the size of your company or organization. In general, if your company has a board of directors, it is advisable to to seriously consider obtaining this coverage.
D&O vs. E&O insurance
While the acronyms D&O and E&O insurance sound similar, these coverages provide different levels of professional liability protection. Errors and omission (E&O) coverage can protect you and your employees if a customer takes legal action against you for errors and omissions in services or misrepresentation. For instance, if a client alleges you haven’t provided an agreed-upon service they’ve paid for, your E&O policy may cover attorney fees or related legal costs.
By contrast, D&O insurance typically doesn’t protect employees. Instead, it provides broader protection for company leaders if a customer, employee, investor, vendor, or another party alleges your directors’ or officers’ negligence has caused a financial loss.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.
