DIRECTORS AND OFFICERS LIABILITY INSURANCE (QUOTES, COST & COVERAGE)
As a business owner, having the coverages that you need in order to protect your business, yourself, and your employees. While there are a lot of insurance policies available to shield your business, one type of coverage that many business owners overlook the importance of is directors and officers liability insurance.one story about an insurance company that refused to pay on a claim due to some oversight by the policyholder. To protect insurers against fraud insurance companies pay hundreds of thousands of dollars annually to investigators, appraisers, and claims adjusters. These employees man the front lines against fraudulent claims and unscrupulous policyholders, which saves the consumer money in insurance costs in the long term.
Lawsuits are becoming increasing common in today’s business world. And, considering the fact that the cost of a D&O lawsuit could end up costing a business hundreds of thousands of dollars that could cause financial devastation, it’s important to make sure that you have directors and officers liability insurance coverage.ble to you should the day come when you must file a medical claim. By taking these precautionary steps you can learn how to make sure your health insurance claim gets paid. This might help you avoid going to battle with your insurer over medical costs you feel should have been covered.k and reward. Choosing a lower insurance deductible also needs to be based on the risk and potential reward for doing so. So if you raised your comprehensive and collision deductibles, your premium would go down but your out of pocket costs would be higher if you have to file a claim.
An Introduction To Directors And Officers Liability Insurance
Corporate directors and officers (D&O) have a duty to manage the company in their stockholders’ best interests. They are bound to use due care and to be diligent in respect of the management and administration of the corporation’s affairs and in the use of its property and assets. Accordingly, they are liable for losses or injuries that are caused by their breach or neglect of duty.
Recognizing the need to have competent directors and officers on executive boards, many corporations have put in their by-laws or charters certain resolutions undertaking to indemnify their directors and officers for legal expenses incurred by them in defending suits based on alleged wrongful acts in their capacities as directors and officers. Such indemnification provisions are permitted by most states’ laws. Protection varies from state to state. In general, state statutes do not protect directors from claims brought by governmental agencies, or claims alleging violations of securities and exchange laws or other federal laws.
The Internal Revenue Service has ruled that premiums paid by a corporation for insurance policies indemnifying the corporation against damages sustained for the wrongful acts of its officers and directors in their official capacity and reimbursing the officers and directors for their expenses arising from such wrongful acts, are deductible by the corporation as ordinary and necessary business expenses. Such expenses cannot be included in income of the officers and directors as noncompensatory fringe benefits.
The premiums for Directors and Officers Liability coverage are thus considered as paid to meet an obligation of the corporation with respect to the employment of its officers and directors. The premium payments are considered noncompensatory fringe benefits, since the insurance protection afforded by the payment of the premiums allows officers and directors to make business decisions while minimizing the fear of unfavorable legal consequences. (Rev. Ruling 69-491.)
Per Internal Revenue Service rules, a business executive who pays his own liability insurance against corporate wrongful acts could claim that expense as a deductible business expense on his income tax return.
Does My Business Need Directors And Officers Liability Insurance?
If your business has a corporate board, an advisory committee, or has any other type of officer, you should seriously consider investing in a directors and officers liability insurance policy. There are even directors and officers insurance for nonprofits.
You don’t have to make millions of dollars in revenue for your board of directors to have a personal lawsuit filed against them. Businesses that are on the smaller side and don’t generate a sizeable revenue are likely to need the protection that this type of coverage offers just as much, if not even more so, than large public companies.
What Does Directors And Officers Liability Insurance Cover?
Most Directors and Officers Liability policies issued are written under a single policy cover, with the following two separate coverages:
- Directors and Officers Liability (Side A Coverage) – pays on behalf of any directors or officers for their liability arising out of wrongful acts.
- Company Reimbursement or Company Indemnification (Side B Coverage) – reimburses the insured company for payment made to its directors and officers. The payments must involve the director or officer’s expenses incurred by reason of claims made against them for wrongful acts, and to which they are entitled by the company’s by-laws.
Directors and officers liability insurance offers protection for the personal assets of a business’ board of corporate directors and officers, as well as their spouses, if they are ever faced with a personal lawsuit. This includes any lawsuits that may be filed by employees, vendors, investors, customers, competitors and various other people, and suits may filed for real or alleged wrongdoings that have occurred while managing a company. This policy usually protects a business, too.
A directors and officers liability insurance policy covers any legal costs, including attorney and court fees, as well as settlements, that may occur when a personal lawsuit is filed against a company’s corporate directors and officers.
Why is D&O insurance so important? There are a number of reasons why someone might decide to sue an officer of a business. Some examples include:
- Using business money in a way that it is not intended to be used
- The misrepresentation of the assets that a company offers
- A breach of financial duties that ends up causing financial losses or even bankruptcy
- Not complying with laws that are established for the workplace
- Misconduct or inappropriate behavior in the workplace, such as sexual harassment
- Stealing the ideas of another business and making revenue off of those ideas
- Theft of a competitor’s customer base
While directors and officers liability insurance does cover a wide variety of lawsuit types, it is important to note that a policy usually does not cover any illegal actions or profits that may be made in an unlawful way.
What Directors And Officers Liability Insurance Doesn’t Cover
D&O insurance typically does not cover (excludes):
- bodily injury and property damage
- fraud and dishonest acts
- breach of contract
Most of the time, a D&O policy will include endorsements with additional exclusions based on the applicant’s risk characteristics. These exclusions might relate to areas such as professional services, antitrust, medical malpractice, and publishing.
Types of Directors and Officers Liability Insurance Coverage
When it comes to D and O insurance, people who own a business have several options to choose from and can adjust their polices to their needs. However, there are three main types of coverage. This includes the following:
- A-Side Coverage. This coverage protects directors, officers and in some cases, employees, for attorney fees, settlement costs, or judgments if a business is unable to cover them.
- B-Side Coverage. This coverage shields the company for any losses that directors, officers and employees may experience if a business is unable to cover them.
- C-Side Coverage. This is also known as entity coverage and it protects the company itself. This coverage my minimize the limits that are available to coverage for individual directors and officers.
D&O Sources Of Claims
Directors and Officers coverage-related losses originated from the following main sources:
- Direct Shareholder/Investor Suits
- Derivative Shareholder/Investor Suits
- Government and Regulatory Agencies
Allegations or suits would result from the following activities:
Direct and Derivative Shareholder/Investor Suits
- Mergers and acquisition
- Inadequate/inaccurate disclosure
- Takeover threats or bids
- Challenge to takeover defense measure
- Divestiture or spin-off
- Financial performance/bankruptcy
- Wrongful termination
- Breach of employment contract (not termination)
- Pension, welfare or other employee benefit disputes
Government and Regulatory Agencies
- Violations of:
- Civil Rights
- Wall Street Reform and Consumer Protection Act(Dodd-Frank) Violations
- Sarbanes-Oxley Act
How Much Does Directors And Officers Liability Insurance Cost?
How much does directors and officers liability insurance cost? There are several factors that affect the cost of directors and officers insurance coverage. The type of business you run, the amount of revenue you may, and whether or not there have been any legal claims filed against your company in the past are all factors that are taken into consideration when determining the cost of coverage.
Further Reading On Management Liability Insurance
Get A Directors And Officers Liability Insurance Quote
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Different States Directors & Officers Liability Insurance
If you are looking for state specific Pennsylvania Directors & Officers Liability Insurance insurance quotes, costs and information: