What is Directors’ and Officers’ Insurance? Are you serving as a director or officer on a board of directors? With this impressive accomplishment comes the responsibility of maintaining successful business operations. In addition to that challenge, there is the possibility of being publicly held responsible for any claims of wrongdoing. Many new and aspiring board members aren’t aware of the personal financial risks involved with their roles. Let’s say that you’re a newly appointed board director or officer and a class-action lawsuit is filed against the company, naming the board members as liable. Mounting a defence against such prosecution is increasingly expensive, and if a board without adequate insurance is found liable, then the board members and their spouses may have to personally pay the settlement costs. Without the proper risk analysis and mitigation, you and your family could suffer significant financial hardship. Directors’ and officers’ (D&O) insurance (D&O insurance) is a specialty type of corporate insurance that exists to protect members of the board. These policies offer liability and litigation coverage for managers, members, and employees against both shareholder and third-party legal claims. Having such insurance in place is essential to protect current and past board members, as well as attract top talent. Directors’ and officers’ liability insurance protects against serious financial risk; without competitive coverage, a potential new hire is less likely to leave their current role. Having liability insurance that has been customized to provide specific coverage for board members is a hiring benefit. How Does Directors’ & Officers’ Insurance Work? D&O insurance exists to cover the costs associated with undertaking legal defence against claims of wrongdoing. This means that if the company suffers financial losses while mounting a defence, it can be reimbursed through the D&O policy. The D&O policy may also cover the legal costs upfront, which removes potential financial loss from the equation. “Think of the policy as a life jacket while out on the open water,” Client Executive Matt Jardine suggests. “If you fall into the water without one, the results can be a disaster. Yes, you can survive, but you are responsible for your survival. You’re the one doing all the work to stay afloat. Like a D&O policy, the life jacket is there to keep you from sinking, which allows you to manage the problem and get to safety.” When a shareholder or investor becomes disgruntled and threatens legal action, D&O insurance activates to keep the board afloat. The board can look to the D&O Insurer to provide legal counsel and cover the cost of defending the claim. The policy is there to support the board as it navigates the legal challenges. It protects against the potential of the directors and officers and their spouses facing the personal financial burden of managing such an event without insurance, allowing the company to continue to thrive through a stressful time. Who needs Directors' & Officers' insurance coverage? All companies with directors and officers should have D&O insurance coverage for their employees who serve on their board. This is true for public, private, and non-profit companies. Should anyone on the board or the company itself face a claim of wrongdoing, D&O insurance can include coverage for litigation costs. Should a company be found liable, D&O insurance helps to protect against personal financial loss. Some examples of D&O risk scenarios include breaches of fiduciary duty, reporting errors, and claims of wrongful dismissal. There are also exclusions as to what D&O insurance may cover. For example: personal profit and illegal remuneration as well as intentional criminal acts like fraud are not covered. D&O risks don’t only affect national or multinational corporations. Owners and operators of small and medium businesses (SMBs) should also invest in D&O insurance. You may think your business isn’t big enough to need it, but no business is too small for risk mitigation. In fact, SMB owners are often more personally invested in their business and have created closer connections to their personal finances. While a SMB may not be at risk of a national class action lawsuit, they are still accountable to their customers and subject to operating regulations. Because of their entrepreneurial spirit, startups can also miss acquiring D&O coverage in their early years. Startups can grow rapidly then slow or see inconsistent growth before they’re well established. Should they wait until they’re financially sustainable to seek D&O insurance? No, as that means putting risk mitigation off until it may be too late to help. When operating in complex sectors like cannabis, fintech, real estate, and software as a service (SaaS), startups carry a high degree of risk for both the company and its board officers. Having policies in place to protect directors, officers, and owners should be a priority. Finally, non-profit boards should also have Directors’ and Officers’ liability insurance coverage. These policies can protect both the board members and the non-profit organization from serious financial risk or interruption of services vital to marginalized groups. At the end of the day, your financial safety and the security of your family is paramount whether you’re an owner/operator of SMB or a global director. At EQUA Specialty Risk Partners Corporation (EQUA), we specialize in scalable D&O insurance solutions that fit your specific circumstances. We’ll take the time to educate you on the risks, and then help to ensure that you’re protected. As your career progresses and your company grows, we’ll work with you to evolve your risk mitigation processes. What types of Directors’ & Officers’ insurance are there? There are three main types of coverage for D&O insurance. Companies will often need a combination of these types to fully mitigate foreseeable risks. Side A – Individual Directors and Officers: meant to protect the personal assets of the organization’s directors and officers Side B – Corporate Reimbursement: meant to cover financial losses incurred by the company in indemnifying directors and officers Side C – Entity Coverage: extends to cover liability incurred by individual directors and officers alongside the organization Additional Considerations: Fiduciary Liability: addresses claims arising from the mismanagement of an employee benefits plan Employments Practice Liability: responds to claims or allegations such as wrongful termination and failure to promote Personal Indemnification: provides individual directors and officers an additional limit of liability in excess of the existing policy limit Defence: affords individual directors and officers additional defence in excess of the existing policy limit How do you choose the correct Directors’ & Officers’ coverage? You may not need each of these types of coverage, or you may already have some coverage included in your existing policies that needs to be supplemented. Directors and officers are busy individuals—they can’t be expected to carry out their roles and be insurance policy experts. That’s part of why EQUA works in specialty sectors to ensure that high risk businesses are given the best coverage possible. We believe it’s important to fully explain the risks an uninsured board or owner/operator is exposed to and then build a customized D&O policy that offers exactly the protection that they need. As a specialty insurance brokerage, we’re able to work with a variety of insurance providers to do just that. A challenge to selecting Directors’ & Officers’ insurance that’s worth mentioning is that the number of insurers who offer it has decreased in recent years. Increases in legislation and faster dissemination of information over social media has brought more and more attention to claims of wrongdoing than previous generations of directors and officers had to face. Exclusions to policies have increased, as coverage narrows, which means an insurance broker who prioritizes your business’ risk mitigation is a must-have, regardless of the size of your company. Other ways to protect yourself and your business Much like D&O insurance, cyber insurance is something that businesses may think they’re too small to need. The belief that data breaches or cyberattacks only affect major corporations is a misconception. Smaller scale data breaches like phishing often target multiple individuals for lesser financial amounts or to seek personal data necessary for accessing banking and committing identity theft. Did you know that there is no regulation in Canada or the USA for cyber insurance? This means that companies can be left without enough coverage or no coverage at all. EQUA partners with a cyber security firm to conduct an audit of our clients’ online ecosystem and assess their potential cyber security risks. Then we work with our cyber insurance partners to ensure that your business is protected with coverage built to its specific needs. Through our partners, we can also offer personal cyber insurance to protect your home and family devices. This insurance is of the same high quality as what is provided to corporations, with three tiers of coverage available. Learn more about these coverage options on our website. Conclusion Whether you’re an aspiring board director, already a member, or the owner of a SMB, Directors’ and Officers’ insurance is an important measure to mitigate risks for your company and protect your personal assets. It is a specialty insurance service, so it’s important that you work with a broker focused on risk mitigation who can assess, and then build a set of policies that provide full coverage specific to your needs. It’s never too early to explore the coverage options for D&O insurance, as it’s something that can protect entrepreneurs, startups, and non-profits. At EQUA, we take risk analysis and risk mitigation seriously for each and every one of our clients. That’s why we operate as an independent corporate insurance brokage, and how we’ve gathered insurance experts across multiple sectors with deep knowledge and experience. Together, our team has more than 300 years of insurance expertise and we’re ready to use it to your advantage. Connect with us via findoutmore@equaspeciality.com to get started.
