The Basics of Directors & Officers Insurance

Directors & officers insurance, TJ Woods Insurance Agency, Worcester, MAWhen a company gets big enough, it’s oversight must be managed by key employees known as directors and/or officers. From the Chief Executive Officer to a Board of Directors, these key people make decisions and set policy that can have dramatic effects on the company, its employees, its beneficiaries, and the public. Since these changes can result in changes to the company’s image, profitability, and employment, these directors and officers have a lot of liability leveled directly at them. When your managers have the looming threat of lawsuits leveled by internal and outside interests, it’s important to have them protected.

The Purpose of Directors & Officers Insurance

When you’ve got multiple officers and directors in your company, a lawsuit that drags one or more of them into a legal battle hurts the company multiple ways: not only are they unable to do their job effectively, but your company is saddled with the legal costs, regardless of the outcome of the lawsuit. For many companies the cost and time lost, combined with the potential fallout of the cause of the lawsuit, can be a huge issue.

Directors & Officers Insurance – also known as D&O insurance – is for advanced companies who generally have officers and a board of directors (which usually entails being a publically traded company): if directors or officers require legal defense, D&O insurance covers the cost. D&O Liability Insurance provides funds in advancement or for reimbursement of legal costs due to legal action brought against directors and officers.

What It Protects Against

When looking at the coverage, it’s important to understand exactly what it protects against. In short, Directors & Officers Insurance protects against lawsuit brought against them in their capacity as a company decision maker. Coverage includes and extends to:

  • Errors or omissions
  • Employment decisions (hiring and firing)
  • Unlawful acts
  • Erroneous investment
  • Conflict of interest
  • Releasing information that is confidential
  • Failure to maintain assets and property
  • Gross negligence

Types of Coverages

Directors and Officers Insurance generally comes in three common forms, known as “Side A,” “Side B,” and “Side C” policies. The difference of coverages is the relationship between D&Os and their company, and covering the costs if one side brings legal action against the other.

Side A: Non-Indemnified

The first policy is the most common, providing coverage to past, present, and future directors and officers. They are provided with funds or reimbursement when they are legally defending against legal action, including when they are not indemnified (considered harmless for losses) by their company

Side B: Indemnified

Instead of directly paying the directors and officers for their legal fees, Side B is designed for the companies once they indemnify their D&Os. As such, when legal action against their key members causes the company to pay legal fees, this policy reimburses the company.

Side C: Entity Securities Coverage

Designed for larger, publically traded companies, this policy is similar in coverage to Side A or Side B coverage, but with additional coverage against their securities (stock) to reimburse if this legal action causes a loss in the company’s market value.

As your company grows, it’s important to make sure your company grows along with it. Contact TJ Woods Insurance to learn if your company is in the right place for D&O Insurance, or if your existing policies need to be expanded. Also take a look at our Business Insurances section to see if we can help provide peace of mind for other parts of your business.