business reviewing directors and officers insurance

Your Guide to Directors & Officers (D&O) Insurance

Directors and officers liability insurance is an essential part of corporate risk management. According to Investopedia, more than 25% of private companies reported a D&O loss over the span of three years. 96% of these private companies stated the D&O loss affected resulted in a negative, financial impact on their business.

Watch the video below as Peter Katkov, founder of Apex Risk and Insurance Services, explains D&O insurance.

What is Directors and Officers Liability Insurance?

D&O offers liability coverage for company directors and officers to protect them if they are sued as a result of performing their duties at a business. This form of liability insurance serves as a standard indemnification provision, which protects officers in their role in a business. 

What Does D&O Insurance Cover?

Directors and officers insurance can cover settlements and defense costs. Additionally, D&O can insurance can cover other costs associated with wrongful act allegations and lawsuits. 

What Does D&O Insurance NOT Cover?

Most D&O policies exclude:

  • Fraud
  • Criminal activity or offenses
  • Illegal profits

Additionally, most policies include “insured vs. insured” clauses. In these clauses, no claim is paid when current or former directors and officers sue the company. This prevents the company from profiting from conspiracy. 

How Does D&O Liability Insurance Work?

The process of D&O insurance is straightforward. First, a manager allegedly fails to perform a duty in their role. As a result of this act, several claimants sue the director or operator. The legal team or risk management team is then informed of the situation and provides this information to the insurer. 

According to Investopedia, “If the claim is covered, the insurer covers the defense costs. If the claim is covered and the case is lost, the insurer pays for the defense costs and the financial losses.”

However, those purchasing D&O insurance should be sure to understand their policy and their coverage in an event of a director or operator being sued. 


Let’s Talk About Side A, Side B, and Side C

The typical D&O insurance policy includes three types of insuring agreements. These insuring agreements are commonly referred to as Side A, Side B, and Side C.

Side A

Side A coverage covers directors and officers for claims where:

  • The company refuses to pay for indemnification, or
  • The company is financially unable to pay for indemnification

For example, this situation may occur if the company has declared bankruptcy.

 Under Side A coverage, the individual officer is insured and it’s their personal assets that are at risk.

Side B

Side B coverage covers the losses of directors and officers when the company grants indemnification. Side B is for the benefit of the corporation.

The policy will reimburse the company for legal fees and costs. With Side B coverage, the company is insured but the corporate assets are at risk.

Side C

Side C, also referred to as entity coverage, extends coverage for the corporate entity itself. 

Many officers and directors will want a company to offer D&O insurance.

What Parties Might Sue Directors and Officers?

The parties suing a director and/or officer may include:

  • Investors
  • Customers
  • Employees
  • Vendors
  • Competitors
  • Other parties

What Are Some Common Risk Scenarios?

Some common risk scenarios include:

  • Employment malpractice
  • Reporting errors
  • Inaccurate disclosures
  • Insolvencies
  • Regulation violations

What Businesses Need D&O Insurance?

All companies with a board of directors should consider investing in D&O insurance. D&O insurance is a must for private companies as they raise capital, negotiate contracts, and accelerate growth. Further, small businesses may also be particularly vulnerable to damaging lawsuits.

Risk can depend on the size and nature of your business. Many officers and directors will want a company to offer D&O insurance.

Why do Directors and Officers Want a Company to Provide D&O Insurance?

The main function of D&O insurance is to allow directors and officers to make decisions without fear of personal financial loss. This allows business leaders to confidently do their jobs and focus on their work knowing that they are protected in the event of an incident.

Not Sure if Your Company Needs D&O?

We use the Apex Proven Process to learn about your business, strategize to assemble the right program for you, and use our deep industry and market knowledge to leverage the best pricing and coverage, and ultimately help guide your decision-making.

What is the Apex Proven Process?

We take the time to understand the full operations of your business. We use this information to do a deep dive into the insurance program, asking questions including:

  • What coverage do you have?
  • What are the limits?
  • How much does it cost?

We utilize these comparisons to find where improvements can be made in your program.

Read on to learn what makes Apex different, here.Learn more about us, here. We are dedicated to providing custom solutions.