What’s Covered by D&O Insurance and What’s Not?
Business leaders face unique risks that go far beyond typical business operations. When directors and officers make decisions that affect their company, shareholders, and stakeholders, they can become personally liable for those choices. D&O insurance provides crucial protection for such situations.
Understanding exactly what this insurance covers—and what it doesn’t—can mean the difference between financial security and personal exposure for those in leadership positions.
What is Directors and Officers Liability Insurance?
Directors and officers liability insurance protects company leaders from personal financial loss when they face lawsuits related to their corporate decisions. This specialized liability coverage shields directors, officers, and the organization itself from claims alleging wrongful acts in their professional capacity.
For example, securities class action filings (which often target directors and officers for alleged mismanagement or failure to disclose key information) are up from previous years, with 222 filings in 2024. D&O insurance typically operates on a “claims-made” basis, meaning it covers claims reported during the policy period, regardless of when the alleged wrongful act occurred.
What Does D&O Insurance Cover?
Directors and officers liability insurance provides broad protection against various management-related claims, such as the following:
Legal Defense Costs
It covers attorney fees, court costs, and other legal expenses associated with defending against covered claims. These costs can quickly escalate, often reaching hundreds of thousands of dollars even for frivolous lawsuits.
Settlements and Judgments
When directors or officers are found liable, D&O insurance pays for court-ordered judgments and negotiated settlements, protecting personal assets from being seized to satisfy claims.
Regulatory Investigations
Coverage extends to costs associated with regulatory investigations by government agencies, including attorney fees and other related expenses during formal inquiries.
Employment Practices Claims
Many D&O policies include coverage for employment-related lawsuits, such as discrimination, harassment, and wrongful termination claims against company leadership.
Breach of Fiduciary Duty
Protection against claims alleging mismanagement of employee benefit plans, improper handling of company assets, or violations of fiduciary responsibilities.
Who is Protected Under D&O Insurance?
D&O insurance coverage typically extends to three categories of individuals and entities:
- Individual Coverage protects current, former, and future directors and officers from personal liability. This includes board members, executives, department heads, and other management personnel who make decisions on behalf of the company.
- Corporate Reimbursement Coverage reimburses the company when it covers legal costs or settlements on behalf of directors and officers for claims against them. Many companies are legally required—or choose—to take on these costs to protect their leadership team.
- Entity Coverage protects the organization itself against certain types of claims, including securities lawsuits and regulatory investigations targeting the company directly.
What D&O Insurance Doesn’t Cover
Understanding exclusions is just as important as knowing what’s covered:
Criminal Acts and Fraud
This insurance excludes coverage for intentional criminal acts, fraud, or dishonest conduct. If directors or officers knowingly violate laws or engage in fraudulent behavior, they cannot rely on insurance protection.
Personal Profit or Advantage
Claims arising from directors or officers receiving improper personal benefits or profits to which they were not legally entitled are typically excluded.
Bodily Injury and Property Damage
D&O policies don’t cover traditional general liability claims involving physical injury to people or damage to tangible property.
Employment Practices by Non-Management
While this insurance may cover employment practices claims against leadership, it typically doesn’t cover claims involving non-management employees unless specifically included.
Pollution and Environmental Claims
Environmental contamination and pollution-related lawsuits are generally excluded from standard D&O coverage.
Common Misunderstandings About D&O Insurance
To review, here are some common misconceptions about directors and officers liability insurance that could leave businesses vulnerable:
- Misconception 1: “General liability insurance covers management decisions.”
General liability insurance protects against bodily injury and property damage claims but doesn’t address management liability risks that D&O insurance specifically covers. - Misconception 2: “Only large corporations need directors and officers liability insurance.”
Small and medium-sized businesses face similar management liability risks. Private companies can face lawsuits from employees, customers, vendors, and even minority shareholders. - Misconception 3: “D&O insurance covers everything directors and officers do.”
While coverage is broad, significant exclusions exist. Criminal acts, intentional fraud, and personal profit schemes are never covered. - Misconception 4: “Corporate indemnification is enough protection.”
While companies may promise to protect their leadership, corporate indemnification has limitations and may not be available if the company faces financial difficulties.
Protect Your Leadership Team Today
Don’t leave your directors and officers exposed to personal financial risk. Contact Bethany Insurance Agency today to learn more about insurance options tailored to your organization’s specific needs. Our experienced team can help you find the right protection at competitive rates.
Give us a call or request a quote online to get started.
