Directors & Officers Liability Insurance

Directors and Officers Liability Insurance: Bridging the Coverage Gap

Unlike commercial general liability policies, which cover claims related to property damage and bodily injury, D&O policies specifically address “wrongful acts." These may include actual or alleged errors, omissions, misleading statements, neglect, or breaches of duty.

A D&O policy offers coverage for defense costs and indemnity to the individuals named in the policy, which can include:

• Coverage for individual directors and officers
• Reimbursement for indemnification obligations to directors and officers serving on the board
• Protection for the organization itself

Indemnification provisions are generally included in a corporation's charter or bylaws. However, smaller privately held companies or nonprofits often lack the financial means to fulfill these obligations, making such provisions ineffective. A D&O policy provides an additional layer of protection in the event of a covered loss.

Directors and Officers Liability Insurance Coverage Details

Most D&O policies include a “fraud" exclusion, which removes coverage for losses stemming from dishonest acts, willful violations, or illegal activities.

D&O coverage can be customized to meet specific needs, but it’s important to note that policy forms can vary significantly among carriers. This variability, combined with the complexity of D&O claims, underscores the need for a carrier that has a strong commitment to the market, extensive expertise, and sufficient financial resources to manage potential claims.

Additional coverage options for directors and officers may include:

• Entity coverage
• Payment priority for insured individuals
• Severability provisions for both the insured and the application
• Coverage for past, present, and future directors and officers
• “Pay on behalf" clause
• Duty to defend clause

Moreover, some D&O policies can be enhanced with endorsements for Employment Practices Liability (EPL) and/or Fiduciary Liability. While EPL endorsements can broaden coverage, they typically do not include a duty to defend and may come with a significant deductible. Additionally, many EPL endorsements do not offer a separate liability limit beyond what’s available under the D&O policy. If the D&O limit is diminished due to an employment practices claim, personal assets of directors or officers could be at risk.

Fiduciary liability covers liabilities arising from ERISA, holding fiduciaries personally accountable for losses to benefit plans due to alleged errors, omissions, or breaches of fiduciary duties.