How Directors and Officers Insurance Works
In short, this coverage seriously ramps up your existing business or nonprofit insurance.
Whether a business is for-profit or nonprofit, it’s vulnerable to all kinds of risks, including legal troubles. Directors and officers insurance is a critically important tool to keep your business or nonprofit thriving for years to come. It shields your organization from hefty lawsuit costs and helps your board make innovative decisions.
We can help you find the right type of directors and officers insurance for your organization. We can also get you equipped with all the coverage you need long before you ever need to file a claim. But first, let’s take a deep dive into directors and officers insurance.
What Is Directors and Officers Insurance?
Directors and officers liability insurance covers legal fees and damages in case a lawsuit is filed against an organization’s board members, officers or other leadership. It’s purchased by an organization on behalf of those leaders, and kicks in when a lawsuit gets filed against the board.
The insurance company pays for legal representation and damages up to the insurance policy’s cap. Coverage limits are usually $5 million or $10 million.
Coverage protects the assets of corporate directors and officers (and their spouses) if they get sued by any of the following:
- Other third parties
Covered lawsuits include those filed with claims of wrongful acts in managing a company. Many insurance companies also provide legal services like free advice to help avoid claims. An independent insurance agent can help you find the right directors and officers insurance for your organization.
Why Is Directors and Officers Insurance Important?
Directors and officers insurance helps fulfill indemnification clauses, or agreements that an organization will pay for any legal fees and damages incurred by a board member or high-level employee. The clause is usually part of a contract created before influential members are hired.
To fulfill this clause, a directors and officers insurance policy can be paid directly to the group dealing with the legal challenge. It can also be paid out to the organization, which in turn pays for the legal costs of its board members and employees.
Who Needs Directors and Officers Insurance?
Directors and officers insurance is important to get as soon as a nonprofit or business develops a leadership structure, especially one that includes a board of directors. Lawsuits may arise from stockholders who are angry about plummeting prices, employees who feel their benefits were mismanaged, or victims of assault by a member of the organization’s board.
Coverage can be purchased for nonprofits and for-profit businesses. Churches and other religious organizations also sometimes buy this insurance. The reasons organizations use their coverage varies widely.
Top reasons companies filed directors and officers insurance claims in recent years:
- Noncompliance with laws and regulations (34%)
- Negligence (21%)
- Maladministration or lack of controls (7%)
- Breach of trust or fiduciary duty (6%)
- Inadequate or inaccurate disclosure (2%)
- Other (30%)
If board members mismanage employee benefits, that can be a cause for a directors and officers insurance claim. Even a small misstep by a CEO or board member can cause major headaches for an organization. Directors and officers insurance is there to cover any legal fallout.
Who Sells Directors and Officers Insurance?
Directors and officers insurance is available from many different insurance companies, and the best way to find the right carrier for you is through working with an independent insurance agent. They know which insurance companies to recommend to meet your needs, and can provide informed suggestions based on company reliability, rates, and more.
While many insurance companies could create a directors and officers insurance policy for you, finding coverage could also depend on the area you live in. Here are a few of the top companies for directors and officers coverage.
Common Directors and Officers Insurance Claims
Directors and officers insurance protects against many types of lawsuits filed against the board of an organization. Some of the most common directors and officers insurance claims are:
- Breach of fiduciary duty
- Failure to comply with workplace laws
- Theft of intellectual property
An independent insurance agent can provide even more examples of common claims filed under directors and officers insurance and how this important coverage can benefit your specific organization.
What Doesn’t Directors and Officers Insurance Cover?
While directors and officers insurance provides a lot of important coverage for nonprofits and for-profit organizations alike, it also comes with its own set of exclusions. Some of the most common coverage exclusions are:
- Personal profiting
- Illegal compensation exclusions
- Accounting of profits
- Late claim notice
- Bodily injury and property damage
- Criminal or malicious acts
Claims of bodily injury and personal property damage are covered by a business insurance policy’s commercial general liability coverage section. Crime insurance is a policy designed to cover against criminal acts and dishonesty by employees. An independent insurance agent can help you find any additional coverages your organization requires.
Factors determining the cost of directors and officers insurance include:
- Size of the organization
- Annual revenue of the organization
- Risk level of the organization
- Location of the organization
We can help find exact directors and officers insurance quotes for your area and specific organization.