What is Directors and Officers Liability Insurance?
Directors and Officers (D&O) Insurance is a critical component of Management Liability Insurance but can also be a standalone policy. Both ML and D&O insurance protect individuals and companies against legal liabilities, but they have distinct differences in their scope and coverage.
D&O Insurance primarily protects the personal assets of directors and officers of a company in the event they are sued for wrongful acts while managing the company. It can also protect the company itself for claims made against its directors and officers.
What Does Directors and Officers Liability Insurance Cover?
D&O coverage is broken up in to three parts: Personal liability, Company reimbursement, and Entity coverage. The typical claims covered are:
- Breach of Duty: Claims alleging that directors or officers failed to fulfill their fiduciary duties to the company or its shareholders, such as duty of care, duty of loyalty, and duty of obedience.
- Misrepresentation: Claims related to misstatements or misleading statements in financial reports, public disclosures, or other official company communications.
- Negligence: Claims alleging negligent acts or omissions by directors or officers that resulted in financial loss or damage to the company or its stakeholders.
- Errors and Omissions: Claims stemming from errors, mistakes, or oversight in decision-making or managerial actions.
- Employment Practices Liability: While primarily covered under Employment Practices Liability Insurance (EPLI), some D&O policies may include coverage for employment-related claims such as wrongful termination, discrimination, and harassment.
- Regulatory Actions: Claims brought by regulatory bodies for alleged violations of laws or regulations, including investigations and enforcement actions.
- Shareholder Suits: Claims by shareholders alleging mismanagement, breach of fiduciary duty, or other wrongful acts that resulted in financial loss or damage to shareholder value.
- Mergers and Acquisitions: Claims arising from activities related to mergers, acquisitions, or divestitures, including allegations of improper disclosures or unfair treatment of shareholders.
Additional features of typical D&O policies include defence costs, settlements and judgements, investigations, and extradition costs.
What is Typically Not Covered by Directors and Officers Liability Insurance?
It is important to note that while D&O Insurance provides broad coverage, there are certain types of claims that are typically excluded, such as:
- Fraudulent and criminal acts
- Bodily injury and property damage
- Prior acts
- Pending and prior litigation
In summary, a D&O policy provides critical protection for directors and officers against a wide range of claims related to their management activities, ensuring that their personal assets are protected and that the company can attract and retain qualified individuals for these key positions.
Client Example
The Insured is a publicly traded tech company that sees a significant stock price drop after releasing quarterly financials. Shareholders allege that directors and officers provided misleading information about the company’s finances and prospects, causing financial losses.
The shareholders file a class-action against the company, alleging false statements about revenues, growth, and a new product line, inflating stock prices. The claims filed included a breach of fiduciary duty, securities fraud, and misrepresentation in financial disclosures.
The legal representation costs for the directors and officers is costly, due to the complexity of the case. To avoid prolonged litigation, the Insured’s legal defence propose a settlement to the shareholders.
The D&O policy covers the defence costs, settlements, and legal fees, protecting the personal assets of the directors and officers and managing the financial impact on the company.