A Guide to Directors and Officers (D&O) Insurance

Despite being a mainstay of protection for corporations and large enterprises for decades, directors and officers (D&O) insurance is one of the most complex and confusing liability insurance policies.

Whereas D&O insurance, also known as management liability insurance, has been an essential insurance for not-for-profit organizations in Canada and is a common part of a business insurance portfolio for large private and public companies, it’s also necessary for for-profit small to midsized businesses with owners, directors, officers, or a board of directors.

Let’s unpack what D&O insurance covers, its limitations, coverage limits, and deductibles, and why it may be necessary for your small business.

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What Protection Does D&O Insurance Provide?

At its core, D&O insurance is designed to cover the personal financial losses of owners, directors and officers and the legal expenses to defend them in a lawsuit following alleged errors or omissions in their duties. It also covers the organization from the directors’ and officers’ work if their assets are at risk. D&O insurance policies are valid for one year and must be renewed annually when the existing policy expires.

It’s a policy that complements an organization’s existing internal governance guidelines to reduce the risk of directors and officers being exposed to liability claims.

Unlike errors and omissions (E&O) insurance, which covers business owners or independent professionals against professional negligence claims typically from a client, D&O insurance is geared toward defending a board of directors for claims of wrongdoing from employees, shareholders, regulators, or creditors.

It covers allegations or claims of breaching legal or fiduciary duties, misrepresentation and negligence, decisions that negatively affect an organization’s shareholders, making misleading statements, wrongful dismissal or discrimination accusations from current and former employees, and failing to comply with laws and regulations.

There are three types of clauses on which a D&O insurance policy is structured: 

• Side A coverage provides financial protection for directors and officers to cover their defence and potential legal liabilities if the company cannot or will not cover their legal defence while the policy is active and in force. For example, if a company declares bankruptcy, it may not be able to provide its board of directors with resources to mount a defence in the face of alleged wrongdoing.

• Side B coverage reimburses the organization for its legal expenses after paying to defend its directors and officers from a claim or lawsuit during the policy’s period, even for alleged wrongful acts made by an individual before the policy’s period.

• Side C coverage is designed to cover a publicly traded company’s securities-related claims during the policy’s period.

What Coverage Limit Should a D&O Insurance Policy Have?

What coverage limit your D&O insurance policy should have depends on several factors, including your company’s corporate governance structure, the size of the company, balance sheet and the locations where you operate, the organization’s market capitalization and the volatility of its share price should your company look at going public in the future. 

A Zensurance broker can help guide you on how much coverage to purchase based on these factors, but the amount would be based on your tolerance for accepting risk.

How Do Deductibles Apply to D&O Insurance?

While deductibles typically apply to any business insurance policy, for Side A structured D&O insurance, deductibles aren’t usually applied.

However, for Side B and Side C structured policies, deductibles apply. That means when filing a claim, your organization will reimburse the insurance company a predetermined amount once a payment is made for the damages awarded up to the policy’s coverage limit. The policyholder can decide what deductible amount a D&O insurance policy should have, however, you should consider what amount you can afford to pay in selecting a deductible. Generally, the higher a policy’s deductible is, the lower the annual premium for coverage will be.

What Is Not Covered by D&O Insurance?

D&O insurance is not designed to cover the following examples of claims:

• Third-party bodily injury claims
• Third-party property damage claims
• Civic or regulatory fines or financial penalties
• Intentional acts of non-compliance
• Breach of fiduciary duty related to pensions and employee benefit plans
• Pollution-related claims
• Criminal and fraudulent acts
• Lawsuits between directors, officers, or managers within a company

What Is a Claims-Made D&O Insurance Policy?

A claims-made D&O insurance policy covers claims made against the policyholder during the policy’s period, provided that the event that leads to the claim took place after the retroactive or prior and pending litigation date. It will not cover incidents before that starting point, even if a claim is filed during the policy period.

What Is D&O Run-Off Insurance?

Also called extended reporting period coverage or tail coverage, run-off coverage for a D&O insurance policy is an extension of coverage to cover claims after your existing policy is cancelled or expires.

For example, if you terminate an employee during the policy period, but your D&O policy is not renewed, and the employee sues you for wrongful termination after your policy lapses, D&O insurance would not cover the claim.

That’s why adding a run-off or tail coverage insurance endorsement to your D&O coverage may be wise. It’s best suited for D&O insurance policies since claims-made policies do not cover future claims after the policy expires. The endorsement can be tailored to cover a specific amount of time, such as one or two years or more, if required.

How to Get Low-Cost D&O Insurance Quickly

Though D&O insurance can be intricate and complex, our knowledgeable brokers know how to explain it in simple language and ensure your small business and its board of directors are adequately protected.

Fill out our online application for a free quote. With more than 50 Canadian insurance providers in our partner network, let us quickly find the low-cost coverage your business needs.