As businesses grow, so too do their risks. Large organizations find themselves under increasing scrutiny and regulations, which increases your potential liabilities. Although you likely have a great deal of trust in your senior management, mistakes can happen at any level. When a serious problem arises due to the actions of your top brass, directors and officers liability insurance (D&O insurance) can help you recover damages. Here’s how it works.
What Is Directors and Officers Liability Insurance?
First of all, there is more than one kind of D&O insurance. In general, D&O insurance can be broken down into two types. The first is a form of protection for directors and officers. The latter protects the company against damages caused by directors and officers. Both kinds can be valuable to businesses of every size. Consider some situations where you could benefit from having directors and officers liability insurance in your portfolio:
Protection for Directors and Officers
This form of D&O insurance protects named directors and officers from lawsuits that may arise due to their actions in the company. For instance, shareholders in a publicly-traded company could file suit against a specific director or officer. They may allege lost profits due to certain decisions, and their suit would seek compensation for their damages. In these cases, D&O insurance would shield the individual named in the suit from damages, while plaintiffs could still be paid.
Even if the company chooses to grant indemnification to the director named in the suit, your D&O insurance can still cover legal expenses and the damages incurred. Bear in mind, however, that these insurance policies rarely cover illegal activity. If a senior executive embezzles money or defrauds clients, your insurance provider may be exempt from providing any benefits.
Protection for Your Business
Entity coverage, also known as “Side C” coverage in D&O insurance, protects your company from wrongful acts committed by directors or officers. This form of coverage can shield your company’s assets from lawsuits related to misconduct by officers. For instance, if a marketing officer produced an insensitive campaign that led to lawsuits against your company, you could activate your D&O insurance to protect the business as a whole.
While your business might already have some other forms of insurance that protect assets directly, these policies usually do not include any protection from lawsuits. Instead, they focus on protection from physical hazards. That’s why it’s important to round out your policy selection with D&O insurance. Your D&O policy can cover expensive legal fees and prevent losses as you defend the business.
Is D&O Insurance Right for My Company?
D&O insurance falls under the umbrella of management liability insurance. The more senior managers you have, the more likely you are to have a problem with one of them. Therefore, it makes sense for large companies to invest in a D&O insurance policy. However, small businesses can also find themselves in the crosshairs of a lawsuit. Considering that SMBs often lack the capital to deal with an expensive lawsuit, D&O insurance could be useful for them too.
Contact ISU Armac Insurance Services to learn more about D&O insurance and see whether it’s a good fit for your company.