What Is D&O Insurance?

D&O insurance protects directors and officers from lawsuits and legal fees.

D&O insurance, more formally known as directors and officers liability insurance, protects directors and officers at corporations from the cost of lawsuits launched against them by shareholders, employees or creditors. Directors and officers can be held accountable for any number of illegal or unethical actions during their employment, including misuse of company resources, fraud, lack of proper attention to corporate governance issues and failure to follow workplace legislation. D&O insurance protects directors and officers by paying legal fees and agreed settlements and sometimes extends to protect the entity of the corporation, limiting the funds the company must supply to defend its directors.

1. Director and Officer Responsibilities

   • According to the Canadian Association, directors and officers have a number of duties they must meet as corporate leaders, and they can be found personally liable for any missteps. Duty of care refers to the director or officer's responsibility to pay sufficient attention to the business, as demonstrated by meeting attendance and critical questioning of co-director ideas. The duty of prudence requires directors to act on reliable information and adequate deliberation. Finally, the duty of compliance holds directors and officers responsible for following laws, by-laws, corporate articles, employment legislation, securities legislation and other formal laws and regulations.

   Who Sues Directors and Officers, and Why?

   • When most people think of D&O insurance, they think of angry shareholders suing irresponsible directors, but other parties can sue a corporation's directors and officers for negligence, noncompliance and other faults. While shareholders typically sue for improper management of company funds, creditors might blow the whistle for misappropriation or a breach of trust. Employees and even volunteers might start a lawsuit based on unpaid compensation or poor working conditions.

   Who's Covered?

   • According to AllBusiness, who D&O insurance covers varies from policy to policy. D&O insurance always covers board members and offers protection of their personal assets. This kind of insurance can also protect the entity of the corporation if a complainant sues the company as a whole, rather than a specified member of the board of directors. In some cases, insurers extend D&O policies to protect employees and volunteers outside the board of directors.

   Coverage Details

   • D&O insurance generally covers legal costs, lawyer's fees and damages that the court orders director(s) or officer(s) to pay. When deciding on a maximum when purchasing D&O insurance, remember that insurers deduct defense costs from the maximum, unlike with many other types of insurance. In other words, a $2 million maximum won't cover all costs if the company is ordered to pay a $2 million settlement at the end of a trial. No D&O insurance provider will pay for costs resulting from intentional misconduct. Policies differ in how they pay out to the insured, so read carefully. Some only pay once a trial ends, while others pay as expenses are incurred.

   The Difference Between D&O Insurance and General Business Liability Insurance

   • D&O insurance does not cover more general business activities, including meetings, contracts and newsletters, which general business liability insurance does cover. Furthermore, general business liability insurance covers claims for property damage and bodily harm, not covered in most D&O policies. To cover their bases, most corporations invest in both D&O and business liability insurance to guarantee the best protection possible.