D&O liability insurance, which stands for Directors and Officers, has the purpose of protecting Officers and Directors from liability for damages resulting from their actions while working for a company. This includes alleged acts as well as actual wrongful actions. D&O insurance covers expenses related to errors, omissions, neglect, or breach of duty. It is important to note that directors and officers insurance is not only for big, publicly traded companies. Small business executives need D&O insurance as well, since it is not required for a business to have shareholders for the directors and officers to be sued. Another common misconception is that directors and officers insurance policies are not needed for small businesses that already have a general liability insurance policy. The differences between the two types of insurance are outlined later in this article. Furthermore, many small business owners believe that even if their commercial general liability policy does not cover directors and officers, their umbrella insurance policy does. While it is true that an umbrella insurance policy fills in the gaps of a general liability policy, it does not cover lawsuits related specifically to the liability of upper management. This article will help you understand the purpose of directors and officers insurance, how it differs from other insurance policies, and why it is so important for business owners to seriously consider.
Directors and Officers need insurance because they can be held responsible for decisions that are made on behalf of their organization. Claims by internal and external constituents and stakeholders who feel wronged by the Directors’ and Officers’ actions are covered by D&O liability insurance. This protects both the company itself and the Directors and Officers personally. Directors and Officers would be nearly impossible to hire without this type of coverage available.
The policies of D&O liability insurance often cover fiduciary liability and employment practices liability as well. Fiduciary liability covers individuals who administer employee benefit plans, while employment practices liability covers wrongful termination, discipline, discrimination, or harassment. Instances of deliberate illegal acts or profits are usually not covered under directors and officers insurance.
Do not confuse errors and omissions liability insurance or general liability insurance with Directors and Officers liability insurance. These differ greatly based on the risks that they cover. One of the main differences between directors and officers liability insurance and general business liability insurance is that general business liability insurance typically covers negligent acts, while directors and officers insurance typically covers intentional acts. A negligent act is an act that occurs out of careless, inattentive, and irresponsible behavior. On the other hand, intentional acts, which are covered by directors & officers insurance, are willful, deliberate behaviors. These are not legal definitions. Coverage for negligent acts will fall under your company’s general business liability insurance policy, while coverage for intentional actions by management will typically fall under your company’s directors and officers insurance policy.
D&O insurance is a must have for any business that seeks to protect itself against liability for monetary damages arising from the decisions of Directors and Officers.