Directors & Officers (D&O) Liability insurance protects directors and officers from personal losses if sued. D&O policies have two or three parts. Part A covers directors and officers directly. Part B covers the corporation’s expenses paid on their behalf. Part C, or “entity coverage,” covers the corporation itself when sued. D&O policies vary between insurers. They address how claims arise, who can be sued, and when the policy responds. For private companies, Side A coverage deserves discussion. Side A has no retention or deductible. The insurance company pays first dollar. Dedicated Side A policies are available as extra protection. Insurtech refers to innovations that improve insurance efficiency.
What Does a D&O Policy Cover?
D&O insurance protects directors and officers if sued. The policies have parts: Part A covers individuals directly, Part B covers defense costs paid on their behalf, and Part C covers the company itself when sued. Policies vary between insurers on how claims arise, who can be sued, and when coverage applies. For private firms, Side A deserves discussion since it has no deductible and the insurer pays first dollar. Extra Side A policies are also available.
D&O policies use claims made basis, noting when claims are reported versus when acts occurred. Sides A, B, and C address how claims can arise, who gets sued, and when coverage responds.
Allocation and Exclusions in D&O Policies
If no corporate coverage, insurers allocate defense and settlement costs between covered officers and uncovered company to determine how much the policy pays. Allocation provisions assign percentages, like 70/30 splits. Severability makes sure one person’s issues do not hurt others. Policies also differ on which staff are covered beyond directors and officers. Broader policies add managers and committees. More coverage means wider protection, often at a higher premium.
Side C policies may get seized in bankruptcy, leaving officers without coverage. So extra Side A policies are viewed as a best practice. Exclusions apply for fraudulent/intentional acts, prior known circumstances before the policy start, or uninsurable business risks covered elsewhere. Still, the insured gets defended until proven guilty. Policy declarations show limits and deductibles.
Considerations Before Purchasing D&O Insurance
Before buying, consider what sides are covered – officers, company, or both. D&O does not cover professional services, only litigation naming directors and officers. A policy provides broader and more reliable indemnity than corporate backing alone. But renewals bring renegotiations, and exclusions and limits still apply.
As companies grow, more D&O investment ensures appropriate protection at milestones. In pricing D&O, insurers consider sector, stage, financials, management, and governance. Startups should emphasize sound protocols pre-policy to get the best rates. Reasons for denial include risk level and prior issues. Changing providers requires understanding new coverage. With major transactions, review D&O details.