Directors & Officers Insurance

D&O insurance safeguards company executives from lawsuits made by shareholders, investors, or competitors, protecting their personal assets from being at risk due to alleged wrongful acts while managing the business.

What Is D&O Insurance?

Directors and officers insurance, also known as D&O coverage, protects the leaders of for-profit businesses and non-profit organizations from legal fees and other costs resulting from a lawsuit. These cases often involve accusations of misconduct or mismanagement, and can result in personal liability for directors and officers.

This insurance protects company leaders from personal financial loss and legal fees incurred in lawsuits. However, it does not cover illegal profits or criminal actions.

Companies often buy D&O insurance when seeking funding, but it has more benefits than just fulfilling a requirement. Investors prefer portfolio companies with comprehensive coverage, particularly an active D&O insurance policy, for two main reasons.

Investors require liability insurance as a non-negotiable term sheet item. It protects their employees from legal liabilities and ensures that you have the necessary capital to cover legal expenses in case of disputes.

D&O Coverage?

D&O insurance is not just for lawsuits against company leaders. It is a three-part coverage that benefits many types of businesses at different stages.

Why You Need D&O Insurance Coverage?

D&O insurance is often necessary for high-liability businesses, those seeking top executives, and those with a board of directors. Quality executives may require this insurance to protect their personal liabilities before joining your company.

Public and Private Businesses

Private companies can also face SEC and securities litigation consequences, despite common misconceptions saying otherwise.

Venture-Backed Companies

D&O insurance is needed in most investor agreements. A strong program can aid funding efforts and prevent losses.

Business with Significant Liabilities

If a company owes over $1 million to creditors, it’s important to have this coverage to protect the business and its leaders if the company goes bankrupt. Creditors may blame the company leadership for not being paid in full and start investigations.

Reasons to Get D&O Insurance

What Does D&O Insurance Cover?

D&O insurance defends companies and executives from lawsuits related to mismanagement. Check your policy or talk to your agent to understand coverage. Review three layers of D&O insurance.

Side A

If a director is sued and has to pay for legal defense or settlements, the directors and officers insurance will cover them. This insurance will only kick in if the company is unable or refuses to cover the individual. This can happen if the company is insolvent or if the claim doesn’t align with the company’s by-laws.

Side A Excess

If you use up the policy, Extra Side A coverage kicks in. The company usually sets a base level of A-B-C coverage for $5 million or $10 million. Additional coverage beyond that usually focuses on Side A.

Side B

Side B coverage reimburses costs for insured individuals named in a lawsuit.

Side C

This coverage protects both the company and an executive named in a lawsuit. It covers costs and settlements.

D&O Insurance Enhancements

Insurance add-ons, or riders, change what’s covered in a policy. They’re useful for customizing a public D&O policy. Common add-ons include: adding, deleting, or excluding specific coverage.

Additional Side A Limit

Additional Side A Limit

Extra coverage on Side A is available if the policy limit is reached.

Dilution Claims

Dilution Claims

Shareholders may feel their ownership in the company is reduced after a funding round.

Bump-up Claims

Bump-up Claims

If shareholders are not happy with an acquisition offer, they can use this endorsement.

Employed Lawyers

Employed Lawyers

Company lawyers are often involved in D&O lawsuits, but are generally not protected by regular D&O policies.

Class Certification Investigation

Class Certification Investigation

Carriers may cover some class certification investigation expenses via sublimits.

Roadshow Coverage

Roadshow Coverage

Claims may come from misinterpretation during pre-IPO preparation.

Broad Change in Control and M&A Provisions

Broad Change in Control and M&A Provisions

Companies going through too many changes risk losing their insurance coverage.

Pre-arranged ERP (“Tail”) Pricing

Pre-arranged ERP (“Tail”) Pricing

Report claims even after policy expires with the ERP add-on.

D&O Claim Examples

Every company faces unique risks, so we can structure your policy to fill the gaps in coverage with numerous market-leading enhancements.

Shareholder Suit

An investment firm purchased a fintech company and then sold it for a higher price. Angel investors without board seats are suing, claiming the board didn’t do enough research and undervalued the company, resulting in a big loss for shareholders. The case was settled for $1.4 million.

Class Action Suit

A group of students sued an EdTech startup for falsely claiming their technology was accredited for college classrooms. The damages sought included additional class expenses and lost income. So far, the company has spent $500,000 on legal defense.

Failure to Disclose

A ride-sharing company is accused of inducing an investor to issue a note payable by exaggerating its forecasted growth and failing to disclose a tax lien. The company defaulted on the note and the investor agreed to convert it to stock, but had already spent over $500,000 in defense costs.

D&O Insurance FAQ

Who Does D&O Insurance Cover?

What does D&O Insurance Cover?

Most public companies buy a D&O policy that covers all three sides. This policy is usually stacked with primary and excess layers.

What Does A D&O Policy Not Cover?

Other insurance policies, aside from D&O insurance, typically cover the following claims, including:

What are some standard D&O exclusions?

Remember to review your D&O policy—even upon renewal—to ensure you’re getting the coverage you need as one word or phrase can transform an entire policy. Still, here are a handful of common exclusions:

Deliberate criminal, dishonest, or fraudulent acts and claims involving illegal profits are not covered by insurance policies, as stated in Conduct Exclusions. If such acts are proven, the carrier would seek to recover any payments made to defend the perpetrator. We suggest clarifying that this exclusion is undeniable and the carrier should never have defended the bad actor.

The Major Shareholder Exclusion can be added separately. It means that claims brought by shareholders who own a certain percentage of the company won’t be covered under the D&O policy. Contact us to discuss how this affects your coverage.

What D&O exclusions are considered "red flags"?

Some D&O insurance policies have additional exclusions that are considered “red flags”.

How Much Does D&O Cost?

Not all D&O policies are the same, and leaders must weigh several factors. However, flexibility is key in challenging markets regarding limits, retention, and carrier options. To create a D&O program, assess your risk tolerance, limits, structure, industry, and coverage needs, as they will impact your policy framework.

Clients often ask us for cost estimates before providing us with their company information. However, directors and officers premiums vary based on each company’s unique circumstances. We can provide an estimated range based on our experience. Factors that underwriters consider include:

How Can I Manage My D&O Policy & Risks?

Company leaders need to recognize their vulnerabilities and get enough coverage. Over half of the top US securities fraud settlements are event-driven. Yet, some leaders still assume they won’t face such losses or neglect their duty.

Private companies must comply with SEC regulations in addition to state corporate laws. Publicly-traded companies are subject to more federal regulation under the Securities Act of 1933 and the Securities Exchange Act of 1934. The D&O insurance landscape can be complex and challenging, especially with increased scrutiny from shareholders.

Review your directors and officers policy with an experienced insurance specialist to ensure you have adequate coverage and limits. Understanding global risks and market trends is only one aspect of the process.

Do you know how much legal fees and defense costs your company may face? To determine coverage needs and potential claims, a thorough review of team leadership and company profile is necessary. Work with an insurance specialist to build a customized D&O insurance plan.

What D&O limits do you need?

Choosing the right D&O insurance limit for your business depends on various factors such as financials, shareholders, industry, and revenue. There’s no standard rule, and the appropriate limit varies case by case. Some companies may need only $5 million, while others require up to $50 million or even $500 million.

How do you structure a D&O policy?

Companies structure their D&O insurance tower based on market cap. Our team has built towers from $1 million to $750 million in limits with 2/3 A-B-C coverage and 1/3 Side A coverage as a fair baseline.

Bad stuff happens.

Imagine a policy that actually covers it.

Shoot us your email and we’ll kick off a conversation to help get you a quote on the best coverage for your brand.