Understanding the protection provided by D&O insurance – II

Last time, our blog began discussing how many businesses make the strategic decision to purchase directors and officers liability insurance, otherwise known as D&O insurance, to insulate their corporate leaders from liability for claims made against them while serving in this official capacity.

Specifically, we examined how the D&O insurance purchased by everyone from privately held firms and for-profit businesses to non-profit organizations and educational institutions is comprised of elements known as “Sides.” We’ll continue our examination of this topic in today’s post.

Those enterprises mulling the purchase of D&O insurance would understandably want to know more about the scope of its protection, meaning the types of claims for which it provides protection to directors and officers.

While the terms of each policy vary, of course, most are designed to protect directors and/or officers against the following types of lawsuits:

• Those alleging mismanagement or breach of fiduciary duties
• Those relating to stock/company performance (i.e., shareholder suits)
• Those alleging misrepresentations in a prospectus
• Those alleging failure to comply with applicable laws, rules and regulations
• Those alleging decisions made exceeded the scope of authority
• Those relating to issues like cyber security, pollution or other regulatory matters

At the other end of the spectrum, it’s important to know that D&O insurance will typically not protect directors and/or officers against the following types of lawsuits:

• Those alleging fraud, illegal compensation and/or personal gain
• Those involving pending or prior litigation
• Those involving property damage or bodily injury
• Those involving the Employee Retirement Income Security Act (ERISA)

All of this raises the question then as to why any business, particularly those of more limited means, would want to consider the purchase of D&O insurance.

According to experts, securing D&O insurance ensures that any legal fees the business may incur in conjunction with a claim against a director/officer will more than likely be covered. More significantly, it helps ensure that strong leaders will remain part of the organization and that outside firms are open to investing.

Consider speaking with an experienced legal professional as soon as possible to learn more about your rights and your options if you are a business professional denied coverage under a D&O policy.

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