D&O insurance: Overview, definition, and example
What is D&O insurance?
D&O insurance, or Directors and Officers insurance, is a type of liability insurance that protects the personal assets of a company’s directors and officers in the event that they are sued for actions taken while managing the company. It provides coverage for legal fees, settlements, and other costs associated with defending against claims made against these individuals in their corporate roles. D&O insurance is crucial for protecting key decision-makers from personal financial loss arising from lawsuits related to their decisions and actions while serving on the board or in executive roles.
For example, if a director of a company is sued by shareholders for a decision that led to financial loss, D&O insurance can cover legal costs and any settlement or judgment.
Why is D&O insurance important?
D&O insurance is important because it offers protection to executives and directors who are often at risk of personal financial liability in the course of their corporate responsibilities. Without D&O insurance, directors and officers could be personally liable for legal fees and damages arising from claims against them, such as breach of fiduciary duty, mismanagement, or violations of securities laws. D&O insurance provides financial security and peace of mind, encouraging individuals to take leadership positions without the fear of personal financial loss from actions related to their role.
For companies, D&O insurance is a key component of corporate governance, helping to attract talented executives and ensuring that the company is properly protected in the event of claims or disputes.
Understanding D&O insurance through an example
Imagine a publicly traded company where the board of directors makes a decision to engage in a high-risk financial transaction that results in a significant drop in stock price. Shareholders may sue the board members for failing to act in the shareholders' best interests. D&O insurance would cover the legal costs and potential damages for the directors involved in the lawsuit, protecting their personal assets from being seized to pay for the costs.
In another example, a nonprofit organization’s officers are sued for allegedly violating employment laws. The officers' D&O insurance policy would cover their defense costs and any settlement or judgment, helping to shield them from financial liability.
An example of a D&O insurance clause
Here’s how a D&O insurance clause might appear in a corporate governance document or employment contract:
“The Company shall maintain, at its own expense, Directors and Officers (D&O) insurance coverage for its directors and officers during their tenure. The coverage shall include protection against any claims arising from acts, errors, or omissions committed by the directors or officers while serving in their official capacities. The Company shall indemnify the directors and officers against all legal fees, settlements, and judgments, subject to the terms and conditions of the insurance policy.”
Conclusion
D&O insurance is a vital tool for protecting the personal assets of corporate leaders against potential lawsuits and claims arising from their actions in the course of managing the company. It ensures that executives and directors can perform their duties without the fear of personal financial risk. For companies, providing D&O insurance enhances recruitment and retention of top leadership talent and reinforces strong corporate governance practices.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.