What is Directors and Officer’s (D&O) Insurance
Directors and Officer’s liability insurance, (often called “D&O”) is liability insurance that protects the directors and officers of a company against lawsuits alleging wrongful acts in managing a company. The company pays for this coverage so directors and officers can work confidently as leaders of their organization without concern of personal financial loss.
Directors and Officers is a liability insurance policy, payable either to directors and officers of a company or the company itself. The policy will reimburse settlements or defense costs that result from covered claims.
What Directors and Officers (D&O) Covers
Directors and Officers can be held liable for a company’s mismanagement to comply with regulations and to provide a safe and secure work environment. If a company is found liable for losses due to operational failures and mismanagement, directors and officers may be liable as well.
D&O insurance structure
The structure of D&O insurance policy varies on which of the three insuring agreements are purchased (ABC policies are generally chosen – these are standard form policies for publicly listed companies; for private or no-profit companies, only AB policies would be used).
There are several elements—called “Sides”—to a D&O policy, including:
1. Side A—Protects assets of individual directors and officers for claims where the company is not legally or financially able to fund indemnification. Who is the insured? Individual Officer. What is at risk? His/her personal assets.
2. Side B—Reimburses public or private company to the extent that it grants indemnification and advances legal fees on behalf of directors/officers. Who is the insured? Company. What is at risk? Its corporate assets.
3. Side C— Extends cover for public company (the entity, not individuals) for securities claims only. Who is the insured? Company. What is at risk? Its corporate assets.
Directors and officers are often challenged with a growing risk that their company may not be able to reimburse them for a loss. An additional layer of defense to personal funds can be secured by purchasing Side A cover, which insures directors and officers only (not the company) when indemnification is unavailable.
Sometimes not an adequate amount of coverage is purchased for the risk, therefore more Side A coverage is to be purchased for an individual officer to protect his/her personal assets. D&O coverage has become standard coverage for large companies, but all type of organization, such as public, private, or non-profit have the potential of an exposure.
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