Nonprofit, public, and private organizations with directors and officers can be personally claimed against for the actions of the companies they board. Settlements, legal fees, and other charges can rack up to a hefty sum. Directors and officers liability insurance aims to protect against such claims and cover the costs associated with them.
By the end of this article, you’ll know exactly which type of directors and officers insurance is necessary for your company. If your business has executives, you can’t ensure complete protection without a D&O policy.
What Is Directors and Officers Liability Insurance?
Directors and officers liability insurance (otherwise known as D&O or management liability insurance) covers the costs related to legal defence, indemnification, and losses against somebody who serves as an officer or director of a corporation. For-profit, non-profit, private, and public companies often need a D;O policy.
Company executives could be liable for allegations of breach of common law duties, violation of federal or provincial laws, breach of their fiduciary responsibilities, and negligence in their duties.
The Types of Directors and Officers Liability Insurance
The three types of directors and officers insurance relate to the three main company categories — public, private, and nonprofit. Depending on your business, you’ll need a different type:
- Public companies — If you own a public company, you’re always open to scrutiny, and key decision-makers will be held responsible for their actions. With a D&O policy, you have access to legal counsel during lawsuits. Also, you get legal fees and representation covered by the insurance plan.
- Private companies — Even though private companies aren’t open to the same level of scrutiny as public companies, you still need directors and officers coverage. Why? Because company leaders are still exposed. With this kind of D&O insurance, company and personal assets can be protected.
- Non-profits — Executives on the boards of non-profits share similar responsibilities with those on private and public company boards. You usually have less access to resources than for-profit corporations; therefore, protection through a D&O policy is ultra important.
What Does Directors and Officers Liability Insurance Cover?
Directors and officers insurance financially protects directors and officers of a company if they are specifically named in a lawsuit or claim. While all policies differ, they generally cover the following:
- Allegations of negligence or misrepresentation
- Breach of fiduciary or legal duties
- Failure to abide by provincial and federal laws and regulations
- Wrongful dismissals
- Employee discrimination claims
- Inaccurate of insufficient disclosure, misleading statements, or reporting errors
- Mergers and acquisitions
- Competitor claims
- Claims made by your company
- Insolvencies
- Divestitures
- Corporate manslaughter
- Decisions made that result in negative financial consequences for company shareholders
Any legal expenses incurred while defending against the above are covered under directors and officers insurance policies. Such legal fees can include:
- Settlements agreed to avoid a lawsuit going to trial
- Legal defence costs and lawyer’s fees for lawsuits alleging a wrongful act by a director or officer
- Court’s awards after a trial
- Costs related to an investigation into an alleged wrongful act of a director or officer
- Compensation of shareholders’ financial losses
What Doesn’t Directors and Officers Liability Insurance Cover?
Usually, directors and officers liability insurance doesn’t cover the following:
- Property damage
- Fraudulent or criminal acts
- Bodily injury (except corporate manslaughter)
- Claims covered by other insurance policies
- Fines or penalties
- Intentional non-compliant acts
- Company vehicles
Exclusions to D&O coverage come into play when the intention isn’t in the company’s best interest. If a director or officer commits fraud or an intentionally wrongful act for personal gain, the policy won’t cover any fees or compensation relating to the case.
How Are Directors and Officers Liability Insurance Policies Structured?
The scope of your coverage dictates the directors and officers liability insurance structure. Most businesses choose to take out two clauses (A and B), but others can supplement the standard policy with clause C.
Each Side covers slightly different eventualities, as you’ll see below:
- Directors and Officers Liability (a.k.a Side A) — It protects the personal assets held by your directors and officers if your company can’t fund indemnification.
- Company Reimbursement (a.k.a Side B) — With Side B, legal expenses incurred by defending your board of directors are covered.
- Entities Security Coverage (a.k.a Side C) — Side C offers extended coverage specifically for public companies. It only covers securities claims.
We recommend non-profits purchase an AB policy and public companies purchase ABC policies. If you need a large cover limit (over $30 million), you typically need to buy an “extra-layer” policy, which allows multiple insurers to share the risk.
Who Needs Directors and Officers Liability Insurance?
If your company has a board of directors and officers, you should consider acquiring a D&O policy for a number of vital reasons, including:
- Your other insurance policies might not provide sufficient protection.
- You can’t claim ignorance as a defense for the actions.
- The in-doubt parties resigning isn’t enough to settle the claim or lawsuit.
A few examples of the type of organizations that should obtain directors and officers liability insurance are:
- Legion halls
- Special interest associations or groups
- Historical societies
- Foundations
- Counselling services
- Social welfare organizations
- Professional and business associations
- Research institutes
How Much Does Directors and Officers Liability Insurance Cost?
The cost of your directors and officers liability insurance policy depends on a variety of factors. Lower-risk businesses can expect to pay as little as $400 per year for $1 million worth of coverage. Higher-risk businesses, however, could spend over $10,000 per year.
The factors affecting the cost of the policy include the following:
- Your industry — Some market sectors are at a higher risk than others. If you work in the construction industry, you’ll likely pay more for directors and officers insurance than an advertising firm.
- The size of your business — The more directors and officers on your board, the higher the likelihood of facing claims and lawsuits.
- Professional claims history — If your company has a track record of making insurance claims, you are riskier to insure than those without one. Therefore, you should expect to pay a higher D&O price.
- Annual and forecasted revenue — While making a lot of money is fantastic for your company, it may increase your insurance premiums as you have more to lose in a lawsuit.
- Quality control procedures — A steadfast quality control system reduces the likelihood of negligence or mistakes. Thus, you can benefit from a lower insurance premium.
- Experience and training — If you’ve been in the business a long time, you have more experience. Insurers see this as a decreased risk in making mistakes and facing lawsuits. Therefore, with experience comes a decreased directors and officers insurance policy price.
To get the most accurate representation of your premium payment, contact us and we’ll connect you with an insurance broker specializing in your industry who’ll give you a quote.
Is Directors and Officers Insurance On Its Own Enough?
You don’t receive enough coverage with just a directors and officers insurance policy. To build comprehensive protection and bolster your company from all sides, you should consider taking out a few of the following policies in addition to D&O:
Commercial General Liability Insurance
CGL insurance provides financial cover for claims of third-party property damage and bodily injury caused by your company’s negligence or unforeseen incidents. No matter what type of business you run, commercial general liability insurance is almost always beneficial.
With that said, you should especially consider a CGL policy if:
- Your staff conduct business off-site.
- You or your employees visit your customer’s workplace or home.
- Your clients visit you at home or your office.
Product Liability Insurance
Product liability insurance protects you against claims made against a product you distribute, make, or sell that allegedly caused third-party bodily injury or property damage. Incorrect labelling and insufficient safety warnings are the most common product claims.
It’s important to understand that product liability doesn’t protect you against service claims. If your business faces claims related to failure to provide a service as marketed, misconduct, or negligence, you need error and omissions insurance (a.k.a. professional liability).
Cyber Liability Insurance
Data breaches and cybercrime involving your computer networks and data can be costly. With a cyber liability insurance policy, the associated fees and incurred costs are covered.
Generally, most coverages payout for legal costs and damages related to these areas:
- System damage and restoration
- Legal, forensic, and breach management
- Incident response
- System business interruption
Some company owners chose to invest in additional social engineering coverage. It provides cover if one of your employees is manipulated into giving system access or sends funds to a scammer.
Commercial Property Insurance
Commercial property insurance pays out in the event of physical loss or damage to your property and its contents due to a disaster like theft or fires.
The cost of the policy depends on your various factors, including:
- The type of business and the type of property
- Your company’s insurance claims history
- The property’s location
- Age of property
- The property’s condition
Keep in mind that the policy usually won’t cover you if the cause of loss is unexplainable, precious metals, wear and tear due to normal use, or vacant locations.
Commercial Auto Insurance
Sometimes known as commercial vehicle insurance, this policy type covers your work vehicles like cars, vans, trucks, or trailers. You should acquire this type of insurance if you use vehicles to transport people, tools, equipment, materials, or packaged goods.
Like personal auto insurance, there are plenty of optional add-ons to commercial vehicle policies. Depending on how your business uses automobiles, you might want to take advantage of the extra coverages.
Business Interruption Insurance
If your business loses income after a property loss, business interruption insurance compensates that amount. Alongside that, some policies cover your overheads like electricity, water, employee payroll, and rent or mortgage payments.
With that said, it’s not a standalone policy. Oftentimes, it’s included in commercial property insurance coverages or it’s added as a rider.
Legal Expense Insurance
Legal expenses insurance gives you access to legal advice with a lawyer for free. It also covers the cost of retaining the lawyer to sort out a pre-determined list of common problems.
Usually, the policy covers:
- Tax protection if you want to appeal the CRA’s decision.
- Legal representation after your business license is suspended, altered, or cancelled.
- Debt recovery if your client refuses to pay.
- Legal costs to conduct legal action following damage to your property.
- Defence and legal advice if a current or former employee files a lawsuit against you.
- Legal costs if you start a lawsuit against a third party for physically injuring yourself or your employees.
Why Choose LiabilityCover?
Insurance is a somewhat confusing world if you try to traverse it alone. But with the help of our team at LiabilityCover, you benefit from a comprehensive insurance plan in no time at all. Our service is fast and reliable, letting you continue with what you do best — running your business.
We make insurance easy. Let us connect you with industry-experienced insurers today.
Frequently Asked Questions
Does Directors and Officers Liability Insurance Cover Executives of Multi-National Corporations?
If your corporation is multi-national, you need an international insurance solution to ensure your executives are protected in different markets. Usually, this solution includes a worldwide master policy with sub-policies admitted by local insurance. That way, you receive comprehensive coverage.
Do Non-Profit Organizations Need Directors and Officers Liability Insurance?
Yes, nonprofits should take out specific directors and officers insurance to cover defense costs, judgments, and settlements related to lawsuits and allegations. Even though nonprofit board members are volunteers, they aren’t exempt from liabilities.
Can a Partnership or Sole Trader Take Out Directors and Officers Insurance?
You don’t need directors and officers insurance as a sole trader or partnership because you don’t employ executive-level members. Corporations with employee structures that include executives should think about obtaining a D&O policy.
Is Directors and Officers Insurance the Same as Professional Liability Insurance?
Technically, directors and officers policies are a type of professional liability insurance designed to protect specific corporate individuals and the corporation’s liability from indemnifying its directors and officers.
