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Understanding Directors and Officers (D&O) Liability Insurance

Directors and Officers Liability insurance, or D&O, covers corporate activities. Because a corporation is legally a person, as are the directors and officers who direct it, D&O serves to protect each from liability associated with various actions and inactions.

But what happens when corporate interests differ from those of these individuals? In short, the coverage is not the same. An indemnity policy protects the corporation, while a D&O policy covers the individual acts of directors and officers. The two types of policies can work hand-in-hand to provide complementary coverage. They can also work apart.

D&O policies do not cover criminal acts and are primarily for civil remedies, mainly damages. First and foremost, D&O policies represent the interests of the shareholders, as a group, and other corporate constituencies in directing the business and affairs of the corporation within the law.

D&O policies offer individual directors and officers the protection they need from personal liability and financial loss stemming from wrongful acts committed while acting as a corporate officer or director. Most policies also cover the liability of the corporate entity itself when the liability is from a claim involving the company’s purchase or sale of securities.

Keep in mind, all companies – those that employ one or more individuals, work with customers, clients, or even competitors – are at risk. Any perceived violation leaves both the directors and officers of the company, as well as the corporate entity itself, at risk for lawsuit and in need of applicable coverage to adequately protect the business as well as the directors and officers involved.

Employment Practices Liability (EPL) can provide additional coverage, acting like an excess policy in an employment situation, and can also involve claims by and against management. Enhanced coverage on a standard D&O may cover EPL, but should be verified with your insurance agent.  Actions including wrongful termination or demotion, breach of contract or agreement, negligent evaluation of an employee’s performance, refusal to hire or promote someone, workplace harassment, failure to follow the company’s personnel manual and more, can fall under EPL.

Insurance experts advise protecting yourself and your business with indemnity or D&O coverage and suggest you understand exactly what your policy covers. Remember, if your D&O policy does not cover EPL, you should consider purchasing EPL coverage, or have it written into your D&O policy.