Directors and officers liability insurance

From Wikipedia, the free encyclopedia

Directors and Officers Liability Insurance (often called D&O) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization. Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. It has become closely associated with broader management liability insurance, which covers liabilities of the corporation as well as the personal liabilities for the directors and officers of the corporation.^[1]

Typical sources of claims include shareholders, shareholder-derivative actions, customers, regulators, and competitors (for anti-trust or unfair trade practice allegations). Directors and officers of a corporation can be liable if they damage the corporation by breaching their duties and contracts to the corporation, mix personal and business assets, or fail to disclose conflicts of interest. In the United States, however, corporations are often required by law, particularly state law, to indemnify directors and officers in order to encourage people to take the positions. Liabilities which aren't indemnified by the corporation are covered by D&O insurance.^[2] However, the policies have exclusions and must be read carefully.

Directors and Officers Liability insurance is commonly purchased with a companion product "Corporate Reimbursement Insurance" (or "Company Reimbursement Insurance"). When purchased together, a single insurance policy is normally issued which is entitled "Directors and Officers Liability and Company Reimbursement Insurance". Modern Directors & Officers policies now frequently include cover for the Company Entity itself as well as Employment Practice Liability.

D&O insurance is usually purchased by the company itself, even when it is for the sole benefit of directors and officers. Reasons for doing so are many, but commonly would assist a company in attracting and retaining directors. Where a country's legislation prevents the company from purchasing the insurance, a premium split between the directors and the company is often done, so as to demonstrate that the directors have paid a portion of the premium.

A common misperception of D&O insurance is that it makes directors or officers able to engage in acts they know to be wrong; this is not the case. Intentionally illegal acts or any illegal gains/profits obtained by directors/officers are not covered in D&O insurance; coverage would only extend to "wrongful acts" as defined under the policy, which may include certain acts, omissions, mistatements etc. while acting as a director/officer of the organization. Exclusionary language, however, would not provide coverage for fraud, illegal profits/gains, or intentional/wanton illegal conduct by such director/officer (as examples).

[edit] External links

[edit] References

• Bandle, L'assurance D&O (with English and German abstract), Lausanne, 1999

This economics or finance-related article is a stub. You can help Wikipedia by expanding it. v • d • e