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What is Directors & Officers (D&O) Insurance?
Directors & Officers Insurance is an insurance policy to protect the directors and other officers of a company from legal actions initiated against them for their actions and decisions.
Shareholders and third parties can sue the board members, managers, and employees of the company for misconduct and wrongdoing. D&O Insurance will cover the legal expenses, damages, awards, and settlements arising from such claims. The policy also offers protection to the company if it is sued.
What are the Most Common Risk Scenarios for Directors & Officers?
A list of the common risk scenarios for directors & officers is given below:
Breach of fiduciary duty & responsibility towards the company and its shareholders
Actions by shareholders
Non-compliance with laws & regulations
Corporate governance requirements
Misrepresentation in a prospectus
Incomplete or inaccurate disclosures
Regulatory actions & investigations
Shareholder or investor claims
Employment practices & HR issues
Data breaches and cyber losses
Public companies typically face securities lawsuits from regulators and shareholders. But employment practice lawsuits are common for private companies.
Who Needs D&O Insurance Coverage?
Public companies (of all sizes)
Medium-sized private companies
Financial institutions such as private equity firms, venture capital firms, and investment advisors
Companies planning for IPOs
Companies seeking to raise funds through various channels like equity, debt, VC, etc
Companies active in the mergers and acquisitions (M&A) space
Distressed companies and companies recovering from bankruptcy
Companies affected by economic cycles
Startups and high-growth companies
Infotech, biotech, and healthcare companies
Who Can Claim D&O Insurance?
The company and its employees
State authorities and regulatory bodies
Shareholders and investors
Lenders and creditors
Why Do Corporate Companies Need D&O Insurance?
D&O Insurance offers protection against alleged wrongdoing by the company’s directors and officers. There are other important reasons for companies to buy Directors and Officers insurance.
To protect the company’s financial stability and strengthen the balance sheet
To attract and retain top managerial talent for the company’s growth
Company’s exposure to stakeholder claims
To meet the financing requirements before approaching the lenders & creditors for funds
Compliance and regulatory requirements
Corporate governance requirements
Planning for IPOs and M&A activities
Frequently Asked Questions on Directors and Officers Insurance
D&O Insurance protects your company, directors, and officers if they are sued for any wrongdoing or misconduct. The policy covers (i) legal expenses and (ii) any damages, awards, and settlements arising from legal claims.
Yes, it is a good practice for every company to get D&O coverage. Small businesses generally lack financial resources. So they are highly vulnerable to lawsuits filed by their customers and suppliers. D and O insurance offers financial stability in such circumstances.
The cost of directors’ and officers’ insurance is not fixed and depends on various factors like
(i) company size,
(ii) nature of business,
(iii) financial position,
(iv) insurance coverage, and
(v) claims history of the business.
Professional liability insurance protects individuals and businesses that provide professional services, like doctors, accountants, consulting companies, etc. But directors’ and officers’ liability insurance protects the company, its directors, managers, and officers from legal claims made by the stakeholders.