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Comprehensive D&O coverage is necessary for organizations administered by a board of directors since the people serving are frequently held responsible for actions and decisions. Notably, those who serve on boards of directors can be held individually liable for decisions made by that board. Organizations usually purchase D&O insurance on behalf of their board members.
A lawsuit against a board member could stem from various circumstances like a breach of fiduciary duties, misrepresentation of assets to stakeholders, or failure to comply with rules regarding workplace safety. Directors and officers coverage protects the individual assets of directors and officers if employees, merchants, or investors file a legal claim against them.
As a director or an officer, you are individually accountable for the board’s decisions. If you decide to spend capital and then lose that investment, a lawsuit may be the result. Even if you voted against spending the money, if the board had consensus you might still be held personally responsible.
As a business, protecting your assets is a vital consideration and adding D&O insurance protection to your already existing coverage is a smart choice to protect your company.
While it is not compulsory to have a D&O insurance plan, the number of lawsuits against boards of directors has risen over the last several years. Some external factors are increasing the need for D&O insurance among top-level staff such as:
Heightened focus on individual actions: Employees of the company or non-profit administered by the board of directors are increasingly holding respective officers accountable for perceived misconduct.
Interested investors following business development: Investors wield financial power, and more are taking an active role in learning how boards of directors are spending money. When a company does not deliver on promises made, investors are ready to challenge individual decisions, and file lawsuits for damages.
Global economic impact of the COVID-19 pandemic: An unprecedented global health event like this saw boards of directors and chief executive officers making decisions that may never have been considered before. As health and safety of employees and the public was (or wasn’t) prioritized, the risk of potential lawsuits increased.
If you are a member of the board of directors of a business or organization, you likely need some board of directors insurance coverage. Usually, D&O insurance policies have three main types of coverage:
Side A insurance protects directors and officers when the organization declines or is financially incapable of paying for indemnification. A company might not pay for losses if they have declared bankruptcy or suffered other substantial upheaval. Side A coverage covers each officer since it is that person’s assets at risk.
Side B works precisely opposite from Side A. Insurance coverage shields the losses of directors and officers when the company does confer indemnification. For instance, Side B policies reimburse organizations for legal costs. In short, the company holds Side B insurance, and it is the business’s assets that are at risk in a lawsuit.
Side C coverage extends insurance protections to the corporate entity itself.
Selecting the best fit of these three options often depends on an organization’s business model, foundational history, and financial needs. Our brokers can help guide you through your options and find what will work best for your organization.