Running a company means making decisions every day about hiring, money, contracts and strategy. Most of those decisions turn out fine, but when one goes wrong, the people who made it can be sued personally. Directors and officers insurance, commonly called D&O insurance, protects company leaders from that personal financial risk. Although it is often associated with large public corporations, startups, private companies and nonprofits face many of the same exposures.
This guide explains what D&O insurance covers, who needs it, how policies are structured and what affects the price.
What Is Directors and Officers Insurance?
Directors and officers insurance is a type of management liability coverage that pays legal defense costs, settlements and judgments when a company’s leaders are accused of wrongful acts in their management roles. A “wrongful act” is a broad term that can include errors, misleading statements, neglect, breach of duty and other alleged mismanagement.
Without D&O coverage, a director or officer could be forced to pay defense costs out of pocket, even if the claim is eventually dismissed. That risk makes many experienced professionals unwilling to join a board or accept an executive role without it.
Who Can Sue Directors and Officers?
Claims against company leaders come from more places than most people expect:
- Shareholders and investors who believe leaders mismanaged the company or misrepresented its finances
- Employees alleging wrongful termination, discrimination, harassment or retaliation
- Customers and vendors claiming misrepresentation or breach of duty
- Competitors alleging unfair business practices
- Regulators and government agencies conducting investigations or enforcement actions
- Creditors pursuing claims after a company becomes insolvent
The Three Parts of a D&O Policy: Side A, B and C
Most D&O policies are built around three insuring agreements.
Side A: Individual Coverage
Side A protects directors and officers personally when the company cannot or will not indemnify them. This can happen if the company is bankrupt or if the law prohibits indemnification for a particular type of claim. For the individuals, Side A is the most important protection.
Side B: Company Reimbursement
Most companies agree in their bylaws to indemnify their leaders. Side B reimburses the company for the money it spends defending and indemnifying its directors and officers.
Side C: Entity Coverage
Side C covers the company itself when it is named in a claim. For public companies, this usually applies only to securities claims. Private company policies often provide broader entity coverage.
What D&O Insurance Typically Covers
Depending on the policy wording, D&O coverage can pay for:
- Legal defense costs, which are often the largest expense
- Settlements and court judgments
- Costs of responding to certain regulatory investigations
- Claims of breach of fiduciary duty
- Allegations of misrepresentation or misleading statements
- Some employment-related claims, if not excluded
Many private company policies also bundle related management liability coverages, such as employment practices liability and fiduciary liability, into a single package.
Common D&O Exclusions
D&O insurance is not a blank check. Typical exclusions include:
- Fraud and intentional criminal acts, usually once proven by a final judgment
- Illegal profit or remuneration that a leader was not legally entitled to
- Bodily injury and property damage, which belong under general liability
- Prior and pending litigation that existed before the policy started
- Insured vs. insured claims, where one insured person sues another, with some exceptions
- Professional services errors, which are usually covered by errors and omissions coverage instead
That last exclusion is an important distinction. D&O covers management decisions, while professional liability covers mistakes in the services you deliver to clients. For a clear explanation of the second type, see our guide to professional liability insurance.
Who Needs D&O Insurance?
You should seriously consider directors and officers insurance if your organization:
- Has outside investors or plans to raise venture capital
- Has a formal board of directors or advisory board
- Plans to go public or be acquired
- Is a nonprofit that relies on volunteer board members
- Operates in a heavily regulated industry such as finance or healthcare
- Has a growing number of employees
Many investors expect startups to carry D&O coverage once they take a board seat, and qualified board candidates often ask about it before agreeing to serve.
How Much Does D&O Insurance Cost?
There is no single price for D&O coverage. Premiums are underwritten individually and depend on factors such as:
- Company size, revenue and number of employees
- Industry and regulatory exposure
- Financial health and funding stage
- Whether the company is public or private
- Claims and litigation history
- The limits, retention (deductible) and coverage features selected
Private small businesses generally pay far less than public companies, which face securities litigation risk. The best way to understand your cost is to work with a broker who specializes in management liability and can compare several insurers.
Tips for Buying the Right Policy
- Understand claims-made coverage. Most D&O policies are claims-made, meaning the claim must be reported while the policy is active. Plan for continuous coverage without gaps.
- Ask about tail coverage. A run-off or tail policy protects former leaders after a sale, merger or closure.
- Review the definition of “claim.” Broader definitions can include investigations, subpoenas and demand letters.
- Check severability provisions. These prevent one person’s misconduct from voiding coverage for everyone else.
- Consider dedicated Side A limits. Larger companies sometimes buy extra Side A coverage to protect individuals if the main policy is exhausted.
For background on the history and legal context of this coverage, the Wikipedia article on directors and officers liability insurance provides a helpful overview.
Frequently Asked Questions
Is D&O insurance required by law?
Generally, no. But investors, lenders and prospective board members often require it, and it is considered standard practice for companies with outside capital.
Do small private companies need D&O insurance?
Many do. Lawsuits from employees, customers, competitors and investors affect private companies too, and defense costs alone can be significant.
What is the difference between D&O and E&O insurance?
D&O covers leaders’ management decisions. E&O, also called professional liability, covers mistakes in the professional services a company provides to clients.
Does D&O insurance cover nonprofits?
Yes. Nonprofit D&O policies protect volunteer and paid board members and officers, and they often include employment practices coverage.
Final Thoughts
Directors and officers insurance protects the people who steer your company, and in many cases it protects the company’s balance sheet as well. If you have a board, investors or growth plans, D&O coverage is a practical part of responsible governance. Speak with an experienced broker to match the policy structure and limits to your organization’s real risks.
