Directors and Officers

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What is D&O Liability?

Directors and officers liability Insurance (also called "D&O") is a type of liability insurance covering directors and officers for claims made against them while serving on a board of directors and/or as an officer. Claim payments can be made to the directors and officers of a company, or to the organization, as indemnification or reimbursement for losses, or advancement of defense costs in the event an insured suffers such a loss that it results in legal action being brought for alleged wrongful acts in their capacity as a director or officer of an organization.

Directors and Officers Liability Insurance

D&O Policy Provisions

Under the "traditional" D&O policy applied to "public companies" (those having securities trading under national securities exchanges etc.), there are three (3) insuring clauses. These insuring clauses are termed: Side-A or "non-indemnified"; Side-B; or "indemnified"; and Side-C; "entity securities coverage". D&O policies may also provide an additional Side-D clause, which provides for a sublimit for investigative costs coverage related to a shareholder derivative demand. In detail, the coverage clauses provide the following:[9]

  • Side-A ("non-indemnified") :
    Provides coverage to individual directors and officers when not indemnified by the corporation as a result of state law or financial capability of the corporation; however, exclusions may apply if a corporation simply refuses to pay the legal defense/loss of a director or officer, or if a bankruptcy court issues an order preventing such indemnification;
  • Side-B ("Indemnified") :
    Provides coverage for the corporation (organizations) when it indemnifies the directors and officers (corporate reimbursement); and
  • Side-C ("Entity securities coverage") :
    Provides coverage to the corporation (organizations) itself for securities claims brought against it (NOTE: securities claims only coverage applies to publicly traded companies and large private companies; small private companies may be able to obtain broader "entity" coverage)

More extensive coverage can be obtained for individual directors and officers under a Broad Form Side-A DIC ("Difference in Conditions") policy purchased to not only provide excess Side-A coverage but also to fill the gaps in coverage under the traditional policy, respond when the traditional policy does not, protect the individual directors and officers in the face of U.S. bankruptcy courts deeming the D&O policy part of the bankruptcy estate and otherwise more fully protect the personal assets of individual directors and officers.

Texas Business Owners Policy Insurance

Who needs a Business Owner’s Policy?

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.Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. Intentional illegal acts, however, are typically not covered under D&O policies.

Other distinctive features of D&O policies are that they:

  • Are written on a claims-made basis,
  • Usually contain no explicit duty to defend the insureds (when covering for-profit businesses), and;
  • Cover monetary damages but exclude bodily injury (BI) and property damage (PD).

It has become closely associated with broader management liability insurance, which covers liabilities of the corporation itself as well as the personal liabilities for the directors and officers of the corporation.