Most people have never even heard of directors and officers liability insurance (D&O). And those that have often assume that it’s only for massive corporations. But we all know what happens when you assume… sometimes you’re incorrect—something like that. But the truth is, whether you’re a well-established corporation with a board of directors or a startup, D&O may be something worth seriously considering.
Weed Ross is a local insurance agency, but just because we’re local, friendly, and in several small towns across Upstate New York, doesn’t mean that we’re not familiar with the ins and outs of D&O. This essential piece of liability coverage could save business owners tons of headaches, time, and, most of all, money. With all of that on the line, it’s important to understand the basics of how D&O works, don’t you think? Below, the experts at Weed Ross have put together a crash course on D&O, so let’s take a closer look.
In this article, we will cover:
- What is Directors and Officers Liability Insurance?
- Who Needs Directors and Officers Liability Insurance?
- What Does Directors and Officers Liability Insurance Cover?
- What Does Directors and Officers Liability Insurance Cost?
What is Directors and Officers Liability Insurance?
D&O is a form of liability insurance that protects directors and officers of a business against lawsuits that claim a breach of their administrative or fiduciary duties. What does that mean, you ask? Simply put, D&O offers financial coverage if employees sue their leaders for their business-related actions. This liability insurance policy is payable either to the leaders themselves or the actual company they represent. D&O typically will act to reimburse the costs that result from the resulting lawsuits.
Who Needs Directors and Officers Liability Insurance?
All businesses need some form of business insurance, but not every business needs D&O coverage. If you’re a coffee cart, your employees probably won’t be suing your board of directors any time in the foreseeable future. But D&O offers several benefits and coverages that are crucial for companies ranging from commercial real estate businesses or real estate investment trusts (REITs), to small, private companies, startups, and more. Basically, if your company is at all at risk of mishandling finances, D&O is worth taking a look at.
Startups are always surprised by this suggestion, but D&O is an excellent form of business insurance for companies that have received or will receive funding from a venture capital or private equity firm. Additionally, the best candidates for leadership roles—especially at startups—will often turn down roles that don’t offer a good D&O policy. So by having this policy, you’ll be able to attract top-level talent.
What Does Directors and Officers Liability Insurance Cover?
D&O covers a variety of scenarios, but the most commonly seen lawsuits that involve D&O have to do with the handling of company finances, the representation of company finances, violations of workplace regulations, or breaches of leadership duties. D&O policies are made up of three insurance agreements, usually referred to as Side A, Side B, and Side C.
- Side A covers claims against directors and officers not “indemnified by the company.” This just means that the D&O policy will cover lawsuits where the leaders are personally at risk and financially responsible.
- Side B provides reimbursement for the company when the business has policies that do, in fact, cover its directors and officers that are being sued.
- Side C offers entity coverage, which means that if the company itself is being sued, D&O will offer reimbursement.
What Does Directors and Officers Liability Insurance Cost?
D&O insurance premiums depend heavily on a number of key characteristics of the business. For example, what is the business’s legal history? What types of assets are at stake? How much debt does the company have in comparison to its revenue? What industry is the business in? Also, it depends on the exact amount of coverage the business needs. But on average, small businesses may be looking at annual premiums of $3,000-6,000, while major corporations could be looking in the tens of thousands.
Still looking to learn more about D&O? If you’re not sure whether or not you need it, talk with one of our local reps. Weed Ross partners with dozens of major insurance providers, so we can help you find the policy that best fits your needs. Contact a Weed Ross agent today.