What is Directors Insurance?
In order to protect an organization and its decision-makers from the risk of getting sued or being held legally responsible for any sort of malpractice, injury or negligence, there is a type of insurance called Directors Insurance. Any allegation of wrongdoing within an organization needs to be investigated and defended, and this can cost a significant amount of money – even if the case doesn’t reach court. This means directors’ and officers’ finances are at risk, so it is essential that companies provide these employees with protection through directors liability insurance.
What does Directors and Officers Insurance Cover?
The main purpose of a directors insurance is to provide financial protection for managers against the consequences of actual or alleged “wrongful acts’ when performing their managerial duties. The insurance will cover the costs for defence and financial losses. Plus, an extension to many of these policies also covers costs for managers generated by administrative and criminal proceedings, or in the course of investigation by criminal or regulatory prosecutors. The coverage extensions are quite important among company directors. That is because they provide managers with a comprehensive and integrated cover that ensures them a reliable, consistent and structured legal defence.
Different markets involve different risks, which means business leaders can be held responsible for a wide range of corporate issues. Directors and office leaders can be held responsible for a company’s failure to comply with regulations and to provide a safe and secure workplace. Moreover, if a company is found liable for losses due to operational failures and mismanagement, directors and officers can be exposed to liability as well.
Claims that are often placed against directors and officers include:
- Stock or company underperformance
- Lack of, or poor corporate governance
- Failure to comply with regulations and laws
- Making decisions without the required authority
- Employment practices and HR issues
Who Needs Directors and Officers Insurance?
Directors and officers liability can provide valuable protection for directors and officers of corporations, privately-held firms, non-profits, not-for-profit organizations, educational institutions, condo associations, homeowners associations and churches. Although policies may vary as to which individuals are covered, D&O liability insurance is generally considered a necessity to protect those who hold leadership positions in business and organizations of all sizes.
What is Directors and Officers Insurance for Non Profit?
Non-profit D&O liability insurance has a purpose to cover the defence settlements, judgements and settlements arising out of lawsuits and wrongful act allegations brought against a non-profit organization. It’s common to see directors and officers of non-profit organizations lacking experience. Generally, they lack sufficient knowledge of their legal duties and responsibilities regarding the position they serve. Directors and officers of organizations who do have more knowledge and experience in the field may take advantage of the less formal approach of nonprofits and even fail to take the same business approach to decision-making as they would if they were working with a profit corporation.
Do I Need Directors Insurance
Small business executives tend to assume that this type of liability is only for publicly traded companies. However, this is far from the truth. Although privately held businesses don’t risk exposure to securities class action lawsuits, a business doesn’t need to have shareholders in order for its directors and/or officers to be personally sued. It only needs to have relationships with vendors or customers or intend to seek venture capital funding or other financial investors. Small business executives also believe that their general liability policy will cover claims involving directors and officers. But generally, these policies don’t cover management liability lawsuits.
What are the Exclusions to Directors and Office Insurance?
Intentional illegal acts and criminal fraud are not covered by D&O policies. Still, the insurance will pay for the cost of criminal defence for officers and directors up until the accused is found guilty. If the director or officer is found not guilty, the policy will cover the costs of criminal defence. However, if the accused is found guilty, the insurance company reserves to right to recoup the expenses they have incurred in defending the officer or director. It is also important to make sure your insurance policy includes severability, which will allow coverage to continue for the remainder of the directors and officers if one of them is found to have committed a crime. Severability will also allow innocent directors and officers to continue to be insured.
When it comes to price, different factors play a role. They include industry, company size, claims history, professional background of directors and officers, mergers and acquisitions history, company profits and company debts. The period cover is usually shown on the policy schedule and renewal notice. But generally, D&O insurance runs for 12 months. The majority of insurances are offered on a claims-made basis, or claim made and notified basis. Know that some policies won’t cover a claim arising from circumstances which they knew about prior to the commencement of the policy.