It can be easy to assume that high-level executives are in relatively low-risk positions in a given company. However, with a high profile position comes other kinds of risk, including the possibility that a director or officer will be accused of wrongful acts or misconduct in his or her position. This is where directors and officers liability insurance comes in.
What Is Directors and Officers Liability Insurance and Who Needs It?
Directors and officers liability insurance (often referred to simply as D&O insurance) is a type of business insurance that is meant to protect a company’s board of directors and various officers from individual liability in the case that one or more of them are accused of breaching their legal responsibilities as business professionals.
Carrying directors and officers liability insurance can serve not only as employee protection but also as a benefit to attract new executives to a company when positions open up.
Depending upon the type of business the company does, the laws that are applicable, and the details of the particular allegations, the claims involved can vary significantly. Similarly, the definition of what constitutes a breach of legal responsibilities may differ based on the position held and the actions taken (or not taken). Ultimately, the details will need to be worked out in the legal process to determine whether or not the D&O insurance policy comes into action.
Any company that plans to assemble a board of directors and hire officers should have D&O insurance to cover it. Companies that work in high-risk industries like finance or insurance absolutely should have D&O insurance to cover the risk of lawsuits, and they are generally the most common purchasers of such policies.
How D&O Insurance Protects Companies and Executives
Directors and officers insurance protects individual board members and officers by preventing them from suffering personal financial losses as the result of legal action. This, in turn, protects the company by allowing business to continue as usual without executives worrying about the possibility of financial loss (or leaving for another company).
If, for example, a director at a publicly traded company makes a business decision that causes shareholders to suffer significant financial losses, he or she may face D&O claims alleging that the decision was made as a result of improper business techniques. With D&O insurance, so long as no illegal activity is discovered, the director will be protected from personal loss.
Coverage Explained: What Counts, What Doesn’t
Business judgment isn’t always perfect—even high-ranking executives can make honest mistakes. As such, coverage depends upon the details of the policy and the case itself. Regardless of any clauses or exclusions, D&O policies do not cover illegal activity or activity that falls outside of the range of a person’s job capacity as a director or officer.
The following are examples of issues that would be covered:
- The CTO unintentionally fails to disclose that she has stock in a small tech company that stands to gain from her employer’s success.
- A director signs off on the termination of an employee who later sues the company for wrongful termination.
Situations like these would not be covered:
- An executive knowingly colludes with other companies as part of a price-fixing scheme (illegal activity).
A director loses control of his vehicle in an icy parking lot, accidentally striking a walking employee (this does not involve his capacity as a director and falls under general liability).
How Much Does Directors and Officers Liability Insurance Cost?
The cost of D&O policies varies by insurance company and may also be affected by the relative risk associated with the company itself. According to financial education site howmuch.net, the average cost of directors and officers insurance is roughly $600 per year for approximately $1 million worth of coverage.
A company with a higher-than-average risk may pay more than $10,000 annually for the same amount of coverage, while a company with a lower-than-average risk could have an annual premium as low as $250.1 For a more accurate estimate that’s tailored to your company, fill out our fast quote request form and get insurance within 24 hours!
Get Reliable Coverage with Affordable Premiums from Tabak Insurance
Whether you’re a growing company that’s just starting to form a board of directors or an existing company looking for better coverage, the liability experts at Tabak Insurance Agency can help you create just the right policy for your company’s needs, risk level, and budget. Request a quote online or call us today at (281) 769-5274 to learn more.
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