Directors and Officers (D&O) Liability Insurance: All you need to know

15 March 2017

All Directors and Officers have a fiduciary duty to exercise due diligence in overseeing the management of the organization they serve. They can therefore be held personally liable should a decision they made result in a loss for the organization. If you are a Director or Officer, you may find yourself in such a situation. Thus it is important that your organization can purchase insurance to help protect you.

What exactly is D&O Insurance?

Directors and Officers serving on a not-for-profit board have responsibilities similar to those of for-profit companies. Not-for-profit organizations, however, might not have the financial resources to indemnify their Directors and Officers, or to pay for an expensive lawsuit. This is where D&O insurance comes in. D&O insurance is liability insurance that provides indemnification for losses or advancement of defense costs should your organization’s board face wrongful act allegations. It is payable to the directors and /or officers of an organization, or to the organization itself.

Consider these…*

A not-for-profit organization was given funds in the amount of $1,800,000 from a third party organization. The directors of the not-for-profit organization used said funds to purchase capital assets. The third party alleged that purchasing capital assets did not comply with the fund policy agreement between the two organizations and sued the Directors and Officers of the not-for-profit organization for an amount of $1,800,000.  

A not-for-profit organization was sued for giving advice regarding the purchase of furnaces on the basis that the client would receive savings through government initiated environmental rebates. During the installation, the government changed their policies as well as the potential value of the rebates. The client sued the organization for the original rebates amount. 

What does a D&O policy cover?

D&O Insurance will provide your organization with the following: 

  • Protection of all current, future and past directors and officers of an organization 
  • Defense costs and financial losses: 
    • Cover costs for directors and officers generated by criminal proceedings and administration 
    • Cover costs for directors and officers generated in the course of investigation by criminal prosecutors or regulators 
  • Protection for the mismanagement of funds 

Cost and Time-period of coverage:

  • D&O insurance premium is calculated on the basis of several variables, including the estimated claims frequency and severity. The following are some of the risk factors taken into consideration when calculating the insurance premium: 
    • The financial stability of the organization 
    • The claims record of the organization 
    • The industry sector of the organization 
  • D&O policy coverage limits start at $1M and can be increased based on the size of the organization
  • D&O insurance coverage is on a claim-made basis. Therefore, claims are only covered if they are made while the policy is in effect or within a contractually agreed extended reporting period (this can extend up to another 72 months after the claim is made). 

Given the increasing liability regulations on directors and officers, and the pressure for transparency among leadership executives, organizations are increasingly purchasing D&O insurance. D&O coverage helps guide good business practice and handles the growing risks that senior executives face. 

D&O coverage reduces the stress that directors and officers experience from the threat of personal liability for each decision that they make; permitting them to perform effectively and in the best interests of the organization. For more details, please contact your insurance broker. 

*The above are claims examples from Northbridge Insurance. Insurance policy coverage ultimately depends upon the facts of each case and the terms, exclusions, and limitations of each policy.

Guide   Quote  Contact

contact Suzanne Liberman
Managing Director - Healthcare