It would be hard to find business owners today that forego buying insurance to protect their businesses. In addition to business insurance, 95% of Fortune 500 businesses opt to protect their directors and officers against personal financial loss with Directors & Officers Insurance. Recently, small business owners started to buy this type of coverage, too. The good news is that this type of insurance (also known as D&O coverage) doesn’t have to seem complicated. Read on for four tips that make understanding D&O coverage simple.
Brief History of Directors & Officers Insurance.
Lloyd’s of London first introduced Directors & Officers coverage in the 1930s, sparked by the economic disaster we call the Great Depression.
In the 30’s, the law did not permit corporations to indemnify their corporate directors and officers. Interestingly, Loyd’s new insurance coverage did not receive great interest when the respected insurance company introduced it because directors and officers did not perceive lawsuits against them personally as a great risk.
That all changed in the latter part of the 1960s when securities laws changed. The changes in the law created increased legal liabilities for directors, officers, and corporations. As a result, insurance companies resurrected D&O policies to protect the financial interests of such persons.
The modern D&O landscape.
Over the last 50 years or so, the number of D&O claims increased and the size of settlements increased as well. Watson Wyatt Worldwide’s D&O Liability Survey Report of 1997 said that 31% of all companies could expect at least one D&O claim. Banks were the largest target of these claims, with 42% of large banks having at least one claim.
According to Towers-Watson 2012 Directors & Officers Liability Survey, traditional securities litigation ranks fourth behind securities fraud, breach of fiduciary duty, and derivatives actions. Claims against technology companies increased in recent years, too.
What Directors & Officers Insurance protects.
Traditionally, personal financial protection is what sets D&O coverage apart from commercial corporate insurance or business owners protection policies. Commercial insurance protects against corporate risks, such as:
- general liability protection against bodily injury or property damage, and
- surety bonds that protect against corporate financial loss through the actions of officers, directors, or employees.
In today’s market, D&O policies often include traditional personal financial protections along with other protections against a variety of liabilities for both the corporation and its directors/officers. Some companies in the D&O market now specialize in particular insurance D&O products for particular market segments.
A few examples of the types of losses that modern D&O policies address are:
- unfair trade lawsuits involving competitors
- Antitrust actions
- Intellectual Property (IP) infringement
- Defends/pays losses from regulatory actions brought by government agencies such as the Federal Trade Commission, Federal Drug Administration, IRS
- Securities claims
Insuring Agreement A/Insuring Agreement B.
D&O coverage under Insuring Agreement A applies when a corporation does not indemnify its directors and officers. The laws impacting indemnification vary from jurisdiction to jurisdiction. Insuring Agreement A provides coverage for directors and officers for losses including defense costs that are a result of their own wrongdoing.
Insuring Agreement B provides corporate reimbursement for loss in cases where the corporation indemnifies its directors and officers for claims against them. It does not provide coverage from corporate liability arising from its own actions.
The two clauses usually mirror each other as to language and conditions.
The difference between D&O and Errors & Omissions (E&O) coverage.
Errors and Omissions insurance covers inadvertent mistakes and failures that cause loss to clients or customers. It does not cover intentional acts or loss due to poor judgment. In today’s business environment, many companies choose to buy both E&O and D&O coverage.
To talk more about this, or anything else, please contact us. We look forward to helping you protect your business.