D&O insurance: Get directors and officers liability insurance
Directors and officers (D&O) can be held liable for their actions at work. Protect your employees and your business with a D&O insurance policy today.
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What is D&O insurance?
Matt Hands, VP, Insurance and MoneySense
D&O insurance, which means directors and officers liability insurance, is a form of business insurance coverage that protects companies financially if a director or officer is held legally liable for their actions (e.g. employee malpractice, reporting error). Whether you operate in the non-profit, public, and private sector, having a D&O insurance policy can cover the cost of legal fees and compensatory damages, allowing you to protect your business financially for the long run.
This product has many names and you may see it referred to as:
- D&O insurance
- D&O liability insurance
- Directors and officers insurance
- Directors liability insurance
- Directors and officers liability insurance
- Board of directors liability insurance
- A type of management liability insurance
Who needs D&O liability insurance coverage?
A common misconception is that only large corporations need directors and officers liability insurance. However, small businesses and privately held companies are not immune to expensive claims just because there are fewer shareholders. In fact, small business owners can face more financial burden from a lawsuit against its directors and officers if they lack the resources and preparation.
Therefore, if your business has a corporate board, board of directors, or an advisory committee, consider adding D&O liability insurance to your commercial policy. You don’t need to be making millions to face a lawsuit against your actions as a manager. This includes businesses in the public, private, and non-profit sectors.
What does a directors and officers insurance policy cover?
A directors and officers liability insurance package covers the cost of legal fees and other costs associated with a lawsuit (e.g. losses, indemnification), against a director or officer of your business. This can include:
- Alleged claims of employment malpractice
- Inaccurate disclosures
- Regulation violations
- Errors in reporting
- Breaches of fiduciary duty
- Poor corporate governance
Insurance companies typically offer D&O liability policies with three different clauses: Side A, Side B, and Side C.
Side A: Directors and officers liability
Side B: Company reimbursement
Side C: Entities coverage
How much is directors and officers insurance?
The cost of D&O insurance coverage varies according to the circumstances of each business, for mid to large scale businesses you can expect to pay between $5,000 to $10,000 annually for $1 million in coverage. Smaller, low-risk businesses could see premiums as low as $500 each year for directors and officers coverage.
compare quotesExamples of directors and officers insurance (D&O) claims
There are many different instances in which a D&O policy can come in handy – here, we cover three different examples of directors and officers insurance claims, so you can better understand the potential coverages on your plan.
Bankruptcy
After your business files for bankruptcy, you’re held personally liable for the unpaid wages of your employees.
Employee allegations
Several employees claim your management team created a hostile work environment, violated regulations, and delivered poor governance.
Financial misrepresentation
Investors hold your board of directors liable after your business reports its financial state on an income statement incorrectly.
What factors impact a directors liability insurance quote?
Just like any other form of insurance, there are number of factors that an insurance company will consider as part of their rating process. Insurers will weigh current industry and market conditions along side the specifics of your business and coverage needs to determine a quote for your individual D&O policy.
- Business industry
Your risk level varies according to the type of business you operate. So if your business is at a low-risk of making a D&O claim (e.g. small startups), your directors and officers insurance premium will be lower. High-stake businesses, such as large public corporations with many managers, face higher costs each month for a D&O policy, simply due to the increased likelihood of a lawsuit.
- Number of employees
The larger your company is in size, the more expensive your D&O insurance policy will be. Having more employees means there are more chances of a mistake being made. Anyone on your board of directors or advisor committee could breach their fiduciary duties or report an error, causing an expensive claim for your insurer to deal with.
- Experience / Age of Business
The more experience you have in your industry, the less you’ll be paying for your directors liability insurance. As a seasoned professional, you can show insurers that you’re competent in doing your job without issues arising. On the other hand, if you lack the job experience, you may be paying higher premiums for a while.
- Revenue and financial position
Bringing in high revenues typically increases your D&O quote because third parties (e.g. employees, investors) can ask for more in compensation during a legal battle, knowing the business revenue is sustainable. However, if your business is in a good financial position, meaning you probably won’t go bankrupt, insurance companies can also lower your premium due to the reduced likelihood of a bankruptcy claim.
- Business insurance history
Your business insurance history plays a large role in determining your D&O insurance quote. If you have a clean, claims-free history, insurers can offer a lower price as it shows you’ve been historically responsible with your business. Having several claims in the past, however, can increase your premium as it shows you're likely to make another one.
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Frequently asked D&O insurance questions
Does D&O insurance have a deductible?
A deductible for a D&O policy isn't as straightforward as some other forms of insurance, but the answer is yes there can be a deductible on parts of the policy.
As we previously established, a directors and officers policy is broken down into 3 sides - A, B and C. Typically a deductible is not applied to side A, but side B and C both have a deductible. This means the policyholder agrees to reimburse the insurance company when filing a claim that falls under either side B or C coverages. The reimbursed payment is a predetermined amount that the policyholder agrees to when purchasing the policy.
The policyholder can determine how much or how little they wish to pay (within a set range) during the purchasing of a policy. The amount the policyholder agrees to pay will impact the price of the policy. The higher the deductible the cheaper the insurance premium. This decision should be based on what the policyholder believes they can reasonably payout if they ever had to file a claim.
Do nonprofits need D&O insurance?
You should still consider purchasing a D&O policy for a nonprofit business because nonprofits are not free of risk from legal battles. For instance, a director could mismanage your NPO’s government funds, breaching their fiduciary duties and cause an expensive lawsuit. Having directors and officers insurance can protect nonprofit organizations, similar to any private or public business.
What’s the difference between E&O and D&O?
Errors and omissions (E&O), or professional liability insurance, protects your business employees if they’re held liable for the results of their actions or advice. For example, if a technology consultant helped create an app that didn’t perform as well as expected, professional liability insurance can help pay for any legal fees and damages.
On the other hand, directors and officers liability insurance (D&O) specifically protects the high-ranking employees in organizations in the event they’re held personally liable (or along with the business) for their actions, including negligence and mismanagement. D&O can be seen as a form of professional liability insurance.
What doesn’t D&O insurance cover?
D&O insurance policies typically don’t cover claims of criminal, fraudulent, or intentional non-compliant acts. Additionally, cases for bodily injury and property damage are not covered under D&O insurance. For that, you need a commercial general liability policy.
Does D&O protect former directors and officers?
Yes, most insurers extend their D&O cover to protect former directors and officers. So if a director left your company a few months ago, but a lawsuit against their past actions recently came to light, your business insurance should continue to pay for the damages and fees involved.
Does D&O insurance cover breach of fiduciary duty?
In general, most policies will cover a break of fiduciary duty claim. The coverage would extend to legal fees, settlement payments, court judgements and and other financial losses.
Is a D&O insurance policy tax deductible?
The policy alone is not tax deductible is not applicable for this insurance. The premiums paid by the insured company on behalf of their directors and officers can be shown as expenses of the company and the GST amount can be claimed.