What kind of actions could cause claims to be made against the organization?
- Breach of fiduciary duty--- not taking due care in making decisions that affect the organizations financial health; violating the duty of loyalty to the organization
- Lack of corporate governance—lack of policies that ensure the organization operates in a legal manner and protects the organization’s assets and reputation
- Misuse of organization funds—personal use of the organization’s assets; embezzlement
- Failure to comply with workplace laws—unsafe working conditions; violating NYS employment regulations
- Accusations of financial reporting errors—issuing misleading financial statements
Directors and Officers Insurance can also be bundled with another business insurance called Employment Practices Liability Insurance (EPLI); when bundled together, this is often part of a management liability insurance policy. EPLI covers claims brought by employees for such things as discrimination and wrongful termination. Bundling the two coverages may be more affordable than purchasing separate policies.
Whether true or not, the following are examples of what Directors can be sued for and the organization must defend against at the organization’s expense. D&O Insurance helps to limit the exposure to the organization and reduce the financial risks associated with these types of actions.
- Absence (or perceived absence) of due diligence
- Misuse of company funds
- Fraud and criminal activity
- Claims that you lured away key employees
- Poaching customers from another business
- Theft of Intellectual property
- Failure to comply with government regulations
- A company’s financial loss
- Decision to sell or merge the company
D&O Insurance has several elements referred to as sides, each applying to something different.
Side A Coverage: protects directors and officers of the organization when the organization cannot indemnify them. Meaning that insurance kicks in when the organization cannot reimburse officers and directors for the cost of defending themselves against claims.
Side B Coverage: protects the organization’s financial health (balance sheet) by reimbursing the organization when it has indemnified the officers and directors. This is also known as entity coverage.
Side C Coverage: when the directors, officers and organization are named in the lawsuit, this eliminates disputes among the 3 groups and covers all 3 parties.
By the way, a director of officer cannot sue another director or officer on the same board and receive any type of payout from the insurance company.
For the insurance to be effective organizations and their officers and directors must operate in a legal and ethical manner. Defense costs and settlements will not be covered if the individual or organization is found guilty of:
- Fraud and Criminal activity
- Willfully lying or providing inaccurate information
- Pending or prior litigation
- Bodily injury or property
Errors and Omissions Insurance (E&O)
Many businesses confuse D&O insurance with Errors and Omissions liability coverage—also referred to as professional liability insurance. E&O covers errors or omissions related to the products and services of an organization, whereas D&O provides coverage for company performance related issues and claims related to fiduciary responsibilities.
What to know about cost of insurance
D&O insurance premiums depend on a few factors: the size of the organization; the number of board members on the policy; the type of business sector the organization operates in (i.e. energy, financial, technology); the amount of revenue the organization handles annually.
The average cost to a small size organization is around $1,000 to $2,000.
Talk to your insurance broker and find out more about the ways you can protect your organization’s assets and your officers and directors.