Guide to Private Company D&O Coverage

Directors and officers owe their company certain duties of care, obedience and loyalty. If these duties are allegedly breached and cause harm to the company or its shareholders, the directors’ and officers’ personal assets and the company’s assets are at risk.

Who Needs Directors and Officers Insurance?

Executives at large public corporations are not the only ones at risk. According to Chubb, 26% of private companies report experiencing a D&O loss within the last three years, losing an average of $387K. To learn more about these risks, read “Unique Executive Risks for Privately Owned Companies.”

Securing directors and officers (D&O) liability, or private company D&O insurance, is one way to protect the business and its executive team from costly litigation. Here are some commonly asked questions about private company D&O insurance.

What Is D&O Liability Insurance?

D&O claims can occur without warning and easily reach six figures. D&O coverage protects board members and officers against claims that their decisions financially hurt their public, private or non-profit company or educational institution. D&O liability insurance coverage can provide legal cost reimbursement to leaders following allegations of wrongful acts, financial mismanagement, errors in judgment and negligence. Read “D&O Insurance for Private Companies” to learn more.

Securing D&O coverage is one way to protect your business and its executive team from costly litigation. Here are some commonly asked questions about private company D&O insurance.

What Are the Benefits of D&O Liability Insurance?

D&O insurance offers the following benefits:

• Balance sheet protection for the company
• Personal asset protection for individual directors and officers when the private company is unable to indemnify them
• A means to attract and retain valuable directors and officers
• Coverage for experienced legal counsel in the event of a claim

What Does D&O Liability Insurance Cover?

D&O liability insurance covers claims against actual or alleged wrongful acts, commonly defined as any error, misstatement, misleading statement, act, omission, neglect or breach of duty committed, attempted, or allegedly committed or attempted by an insured in their official capacity. D&O insurers reimburse the insured for legal fees, settlements and financial losses when the insured is held liable.

What Are Common Sources of D&O Claims?

Who brings directors and officers claims, and why? Here are some directors and officers claims examples:

• Employees allege wrongful termination, harassment, discrimination, breach of contract, pension and other benefit disputes, and defamation or humiliation.
• Governmental agencies or other third parties allege anti-trust, fraud, tax or civil rights violations.
• Competitors or suppliers allege anti-trust, copyright or patent infringement, product or company defamation, or other business disputes.
• Creditors allege violations of loan covenants, mismanagement or negligence
• Shareholders allege financial mismanagement or negligence.
• Customers or consumer groups allege refusal of credit, deceptive trade practices, restraint of trade, fraud or dishonesty, or other contract disputes.

What Does a D&O Liability Insuring Agreement Include?

The D&O liability insuring agreement defines what the insurer will do or cover in return for the premium paid. The following insuring agreements are typically found in a private D&O insurance contract.

Insuring Agreement A – Direct Coverage (“Side A” or “Non-Indemnifiable Loss”)

This coverage indemnifies directors and officers when the company is legally or financially (e.g., bankruptcy) unable to do so. Typically, there is no self-insured retention.

Insuring Agreement B – Corporate Reimbursement Coverage (“Side B” or “Indemnifiable Loss”)

This coverage reimburses a company for its obligation to indemnify its directors and officers, providing balance sheet protection for the company and personal asset protection for the executives. It is subject to a self-insured retention.

Insuring Agreement C – Entity Coverage (“Side C”)

This coverage reimburses a company when the company is named in a suit along with its directors and officers. It provides balance sheet protection for the company and is subject to a self-insured retention.

Side A DIC (“Difference in Conditions”) Option

Excess Side A DIC policies provide additional Side A coverage above a standard ABC policy if the underlying limits are exhausted. These policies typically have fewer exclusions than the primary policy and contain a “difference in conditions” (DIC) provision that allows for the policy to “drop down” and provide primary coverage when the underlying insurer excludes coverage (e.g., pollution exclusion, contract exclusion). This policy will also drop down to defend and pay a claim that is not indemnified by the company, such as a derivative suit or where an underlying insurer rightfully or wrongfully fails or refuses to pay, attempts to rescind coverage or becomes insolvent.

Get Help with Private Company D&O Coverage

Today’s complex, litigious and often unpredictable business environment puts even the most experienced and dedicated executives at risk. If you question Who needs directors and officers insurance or How much D&O coverage is enough, we can help. Hylant’s executive risk experts offer cost-effective programs tailored to your organization’s risk management needs, helping you confidently lead your company. Learn more here.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.