Directors and Officers (D&O) Liability Insurance

D&O liability insurance can be written to cover the directors and officers of for-profit businesses, privately held firms, not-for-profit organizations and educational institutions. In effect, the policies function as “management errors and omissions liability insurance,” covering claims resulting from managerial decisions that have adverse financial consequences. The policies contain “shrinking limits” provisions, meaning that defense costs—which are often a substantial part of a claim—reduce the policy’s limits. This approach contrasts with commercial general liability (CGL) policies, in which defense is covered in addition to policy limits. Other distinctive features of D&O policies are that they: (1) are written on a claims-made basis, (2) usually contain no explicit duty to defend the insureds (when covering for-profit businesses) and (3) cover monetary damages but exclude bodily injury (BI) and property damage (PD).

Most public companies don’t need to be persuaded that their company needs D&O insurance. Public company executives generally understand that D&O insurance is an indispensable prerequisite for a company whose securities are publicly traded.

However, the view among at least some private company managers is different. These officials, particularly those at very closely held companies, feel they are unlikely to need the insurance because, they believe, they are unlikely to ever have a D&O lawsuit. In my experience, just about every company that has ever had a claim was quite sure, before the claim arrived, that they would never have a claim. Executives who have survived a claim know better; too many company officials find out the hard way that when they recognize they need the insurance after all, it is too late. The fact is, the right time to buy the insurance is when you think you don’t need it.

Many of those who resist the need for D&O insurance are affiliated with companies that have only a very small number of shareholders. These company executives look at the ownership structure and conclude their company could never have a D&O claim. This perspective overlooks the fact that the plaintiffs in D&O claim include a much broader array of claimants than just shareholders. D&O claims plaintiffs also include customers, vendors, competitors, suppliers, regulators, creditors and a host of others. In our litigious age, just about anybody is a prospective claimant.

And when a company has claim, expenses mount quickly. Even frivolous suits can be expensive to defend and resolve. At the same time, the cost of insurance to protect private companies against D&O claims is relatively low. Indeed, the incremental costs of private company D&O insurance, on top of the company’s employment practices liability insurance (and no entity should do business in this country without EPL insurance) is relatively slight.

For the relatively low cost, private company D&O insurance buyers obtain coverage that is quite broad. Private company D&O insurance policies are materially broader than D&O insurance for public companies. In particular, the entity coverage under a private company D&O policy is significantly broader than the entity coverage under public company D&O insurance policies. The entity coverage in public company D&O insurance policies is generally limited just to securities claims. However, private company D&O policies contain no such limitation, so the private company D&O insurance policy provides significant balance sheet protection for the insured entities.

​Because the private company D&O insurance policies provide broad coverage at relatively low cost it should be a part of every private company’s risk management portfolio – not just private companies with a broad ownership base.

–Kevin M LaCroix The D & O Diary