Insurance is pivotal to the existence of any private organization. Companies often have to purchase a variety of coverage options to ensure their business is completely safeguarded: property insurance, liability protection, loss control assurance, and more. Directors and Officers Insurance (D&O) is one more type of specialty coverage that companies with boards of directors should consider purchasing.
According to Investopedia, “Directors and officers (D&O) liability insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization.
It can also cover the legal fees and other costs the organization may incur as a result of such a suit.”
A version of Directors and Officers Insurance first appeared in the 1930s, but it didn’t rise in popularly until after the 1960s when securities law went through a series of major shifts. D&O insurance was originally introduced only to protect the assets of individual board members. However, by the stock market crash of 1987, the majority of public companies had D&O coverage to protect both corporate interests as well as personal indemnification.
In the wake of more modern day crises such as the Enron scandal and the financial crash that began in 2007, the number of private companies and nonprofit organizations with D&O coverage has skyrocketed. As expectations for board members have risen sharply in the past two decades, organizations have realized that they must respond to their dependence on directors by purchasing more in depth D&O coverage, which comes in three types that The Hartford has defined below:
“A-side coverage – This part covers directors, officers, and sometimes employees, for defense costs, settlement fees, or judgments if the company cannot indemnify them, such as if the company has declared bankruptcy.
B-side coverage – This covers the company for directors’, officers’, and employees’ losses when the company does indemnify them.
C-side coverage – Also called ‘entity coverage,’ this financially protects the corporation in its own right. Entity coverage may reduce the limits available to protect the individual officers and directors.”
The cost for D&O insurance varies greatly according to the size of your company and the type of business you’re running. It is, however, a necessary component for operating a company (or large nonprofit) with a board in the 21st century.