How D&O Insurance Gives Your Organization Peace of Mind
Directors and officers (D&O) insurance is an important element of protecting an organization and corporate directors, officers, and their spouses. D&O insurance is a built-in personal asset protection plan for individuals and the entire organization in the event they are personally sued by investors, competitors, customers, employees, or other parties for alleged wrongful acts in managing the organization.
D&O insurance protects the organization as well as the individual and covers all legal fees, settlements, and other costs that may arise. The policy also helps organizations and individuals navigate the lawsuit.
These insurance policies also offer indemnification, which does not hold directors or officers accountable for losses due to their role in the organization, especially in the case of bankruptcy. Utilizing both of these policies in tandem is a best practice, especially for larger, publicly traded companies. At the very least, D&O insurance and indemnification policies allow directors and officers to confidently lead their organization without fear of personal financial loss.
According to The Hartford Business Owner’s Playbook, directors and officers can be sued for a variety of reasons including:
Violating fiduciary duties
Misrepresentation of an organization’s assets
Abuse or misuse of an organization’s funds
Theft of intellectual property and poaching a competitor’s customers
Usually, illegal acts or illegal profits are not covered under D&O insurance policies. However, the assurance D&O insurance provides for public, private, and nonprofit organizations are critical.
D&O Insurance for Public and Private Organizations
Purchasing D&O insurance and indemnification policies are usually a normal best practice for public companies. For large, public companies, insurance policies also cover Securities Class Action lawsuits. Because these companies have more people to cover and a higher level of risk, D&O insurance is often much more expensive.
It’s becoming more common for private organizations and companies to invest in D&O insurance policies. Litigation risks are an important factor for all companies with a board of directors, advisory board, or an advisory committee. Even companies who do not have to publically disclose their revenue can face personal lawsuits over management. Also, many investors and venture capitalists will mandate that companies buy D&O insurance either before or after the closing round of financing.
Nonprofit D&O Insurance
Although nonprofit organizations fall into a different category altogether, the investment in D&O insurance is quite relevant for this sector. Oftentimes, nonprofit boards appoint directors and officers who have a passion for the philanthropic cause, rather than their experience as a governance professional. D&O insurance can protect all individuals on a nonprofit board if they find that they are accused of alleged financial mismanagement or misappropriating funds, even if the leadership is working with the best intentions for the cause.
D&O Questionnaires and Insurance
D&O questionnaires are typically distributed to directors and officers before proxy season or when compiling Pre-IPO documentation. However, these lengthy questionnaires also play a key role when applying for D&O insurance coverage.
D&O Insurance brokers will require directors and officers to complete and submit a questionnaire that outlines directors’ and officers’ backgrounds, experience, security ownership, independence of the board, and insider transactions and compensation. The questionnaire also covers family and business relationships.
The questionnaire will also identify or expose any potential conflicts of interest or insider dealing. This information accurately discloses directors’ and officers’ information for proper D&O insurance and indemnification policy application. Although these questionnaires can be quite lengthy and time-consuming, board portal software like BoardBookit offers an easy approach to creating, distributing, collecting, and submitting D&O questionnaires. This secure solution also allows directors and officers to eSign their questionnaires before submission to comply with all legal regulations and documentation.
Does Your Organization Need D&O Insurance?
D&O insurance is not a necessity for every business but should be strongly considered based on the amount of financial risk. Financial mismanagement and fund misappropriation are the main cause of lawsuits against an organization or individuals in a business. D&O insurance also helps to protect against creditors if a substantial amount of money is owed.
D&O insurance policies are also helpful for attracting and retaining top-tier executives and directors. The right talent can help improve an organization. With D&O insurance coverage, experienced leaders will have the confidence to foster a company’s strategy and surpass goals.
Smaller companies and start-ups, in particular, should not overlook D&O insurance, even if investors do not require coverage. Chubb’s 2016 survey found that more than 25 percent of private companies experienced an insurance claim over a three-year period. The companies that did not invest in D&O insurance lost an average of $400,000.
D&O insurance is a vital safety net for many companies including private companies and nonprofits. By investing in insurance and indemnification policies, directors and officers will have the peace of find to lead their organizations fearlessly without the threat of losing personal assets.
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