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What is Directors and Officers (D&O) Liability Insurance?

Directors and Officers Liability Insurance (D&O) cover leaders of an organization from personal financial losses as a result of serving as a leader in the company. The purpose is to cover costs associated with legal fees and settlements if sued.

Who Can Get the Insurance?

Employees may belong to for-profit companies or nonprofit organizations. There is also no specified size as to how large the membership should be. Some officers run companies with tens of thousands of employees, while others only have 100. If one employee can sue them, they can be protected by an insurance policy.

Why Is It Important?

As the heads of entire companies or organizations, directors and officers can be personally sued for various reasons:

  • Allegations of misrepresentation
  • Breach of duty or contract
  • Failure to comply with law
  • Suits over stock performance

Likewise, directors and officers can be sued by a wide range of individuals and other companies, such as:

  • Employees
  • Customers
  • Vendors
  • Investors
  • Competitors

Any company that works with investors is encouraged to obtain D&O coverage. The policy provides equal protection for the directors and investors.

Exclusions

This type of insurance protects directors from their actions; however, the policy terms do not include fraud, criminal offenses, and illegal acts. The “insured vs. insured” clause prevents directors and officers from suing their own company fraudulently.

Final Takeaways

A D&O insurance policy is used for various reasons and takes on different forms. The type of policy that you choose depends on the size of the organization, whether it’s private, public or nonprofit, and the daily risks it faces. The larger the company, the more likely it will need a D&O policy because risks increase with size. 

Directors and officers (D&O) liability insurance policies vary with each insurance company. Consult an insurance agent to determine what your liability coverage gaps and exclusions are.

Updated on May 7, 2020

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