What is D&O Insurance -- and Who Needs It?

Every organization—public, private or nonprofit, as well as the people who lead them—is vulnerable to a multitude of directors and officers liability insurance exposures. What are we talking about?
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• Securities litigation.
• Regulatory actions.
• Allegations of misrepresentation.
• Breaches of fiduciary duties.

Even business leaders in private companies can be held personally liable for claims. In fact, some companies consider this coverage to be one of the most important aspects of D&O insurance. Of course, you will not be surprised to learn that firms that sell this coverage are warning that claims related to regulatory actions are increasing for all types of organizations, representing some 23 percent of claims, according to a Towers Watson Directors and Officers Liability Survey.

A Betterley Risk Consultants D&O report for the International Risk Management Institute notes that officers and board members are asking whether their protection is as reliable as they thought, even as it agrees that such coverage continues to be of interest due to lawsuits alleging mismanagement.

So, what's the state of the market? Actions by several courts and insurance companies have served to call into question whether the D&O coverage will actually pay in certain situations. If the coverage may not be able to pay, it's clear that officers and board members, as well as advisors, are expressing concern.

Most public company potential insureds already buy the coverage and there continues to be a desire for full protection against any personal risk, as you might imagine. Coverage for individuals accomplished the goal of protecting officers and directors against the risk of running a firm or serving on a board. While D&O insurance always has been largely a market of publicly held corporations, that's changing as well.

Privately held companies are just as concerned. Are your own and your organization's assets at risk with every decision you make every day? D&O insurance, say the insurance carriers, will help you if you are vulnerable to a multitude of exposures. Mergers and acquisitions, signs of financial weakness and perceived conflicts of interest can be triggers for devastating claims. You also may be worried that to attract qualified executives and perhaps board members, you need to have such a comprehensive insurance program in place. It will open your eyes to do some research on the internet to see all sides of the D&O debate.

Directors and officers increasingly want additional assurances, beyond corporate indemnification, that added protection will help them if the company goes belly up. Shareholders, competitors, customers, employees and government entities can come nipping at their heels.

Of course, with all of this, professional counsel should be sought before any action or decision is made on the purchase of this insurance.