What D&O insurance covers
Directors and officers (D&O) liability insurance pays defense costs, settlements and judgments when directors, officers and sometimes employees are accused of wrongful acts in their management roles: breach of fiduciary duty, mismanagement, misleading statements to investors, failure to comply with laws or regulations. Claims can come from shareholders, investors, creditors, competitors, customers, regulators and government agencies. Public companies, private companies and nonprofits all buy D&O, with forms tailored to each.
The three sides of coverage
| Insuring agreement | Who it protects |
|---|---|
| Side A | Individual directors and officers when the company cannot or will not indemnify them, for example because of insolvency or a legal prohibition. Usually no retention applies. |
| Side B | The company, reimbursing it when it indemnifies its directors and officers. A retention usually applies. |
| Side C | The company itself (entity coverage). For public companies it is usually limited to securities claims; private company forms are broader. |
Many companies buy an additional Side A difference-in-conditions policy that sits on top and can drop down if the main policy is exhausted or refuses to pay.
Indemnification and the law
State corporate law sets how far a company may indemnify its leaders. Section 145 of the Delaware General Corporation Law, which governs many U.S. corporations, allows corporations to purchase insurance for their directors and officers, and a 2022 amendment expressly permits the use of captive insurance companies for this purpose. Insurance is especially important for losses a company is not permitted, or not able, to indemnify.
Common exclusions
- Fraud and illegal profit, usually applying only after a final adjudication
- Insured versus insured claims, with carve-backs such as shareholder derivative suits and whistleblower claims
- Prior and pending litigation and prior notice
- Bodily injury and property damage, covered by general liability
- Pollution, ERISA (covered by fiduciary liability) and, often, employment practices claims bought separately
What drives the price
Underwriters review financial statements, debt and liquidity, industry, public or private status, planned IPOs, mergers or capital raising, the board's composition and governance, past claims and regulatory issues, and the limit and retention requested. Public companies face securities class action exposure, which usually makes their D&O more expensive than for private firms of similar size.
How to choose and how claims work
D&O is written on a claims-made basis, so give careful notice of claims and circumstances, keep continuity of coverage and arrange a run-off policy when the company is sold. Compare the definition of claim (including regulatory investigations), allocation provisions, severability of the application, priority of payments that puts individuals first, and the order in which limits are shared. Many private companies buy D&O in a management liability package with employment practices, fiduciary and crime coverage.
When a claim arrives, notify the insurer before incurring significant defense costs, because many D&O policies require consent to the choice of counsel and to settlements. Regulatory subpoenas and informal investigations may or may not count as claims, so report them as circumstances if there is any doubt. Keep board minutes and internal communications organized, since they often decide how the case and the allocation between covered and uncovered matters will be resolved.
International programs
Directors of foreign subsidiaries may face claims under local laws, and some countries require insurance to be placed with locally admitted insurers. Multinational companies often combine a U.S. master D&O policy with local policies in key jurisdictions so that payments can be made where the loss arises. Polis Re helps you compare insurers and request quotes for D&O and related management liability coverage.
