As a member of a board of directors, you’re tasked with steering the organization toward success, while simultaneously safeguarding its interests and those of its stakeholders.
But what happens if something goes awry? Are you personally protected against legal claims and financial liabilities arising from your decisions? This is where board of directors insurance comes into play.
Read on to learn more about board of directors insurance, and discover how board management software helps boards safeguard key business data while enhancing collaboration and transparency.
What is Board of Directors Insurance?
Board of Directors Insurance, commonly known as Directors and Officers (D&O) Insurance, is a type of liability insurance that provides financial protection to the directors and officers of a company in case they are sued for alleged wrongful acts. This coverage typically extends to any/all legal fees, settlements, or judgments that may arise from a lawsuit against directors and officers for decisions made on behalf of the company.
D&O insurance covers lawsuits stemming from misrepresentations of company assets, misuse of company funds, breach of fiduciary duty, failure to comply with workplace laws, and a general lack of corporate governance. It will not pay out for instances of fraud, willful negligence, or any situation not explicitly included in the coverage. Most D&O policies contain provisions to separate a guilty party from the organization and other insured executives.
D&O insurance can be purchased as its own policy or bundled with other types of coverage. The organization typically handles the task of buying insurance to protect its officers and directors. Smaller companies may prefer to purchase a combination policy that bundles D&O insurance with employment practices liability coverage for employee-related claims, such as discrimination, harassment, and wrongful termination. Crime and fiduciary coverage can also be included in more comprehensive policies.
Senior executives should review the scope and focus of their company to determine their D&O insurance needs. Next, the organization should contact an insurance company, agent, or broker to discuss their options, request a quote, and apply for coverage. The cost of D&O insurance will differ depending on several factors, such as the type of business, the organization’s financial status, legal history, and risk management practices.
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Types of Board of Directors Insurance
Board of Directors insurance features three coverage policies: Side A, B, and C. Each side protects different elements of the company. Here is what each agreement entails:
1. Side A Coverage
Side A coverage covers the defense costs, settlement fees, or judgments of directors and officers for claims when the organization is unwilling or unable to pay for indemnification. This scenario is most likely if the company declares bankruptcy. Employees are sometimes covered under this policy. Under Side A coverage, the individual officer is insured, but their personal assets remain at risk.
2. Side B Coverage
Side B coverage covers the losses of directors, officers, and employees when the company decides to grant indemnification. In this case, the policy will reimburse the company for defense and other legal costs. Corporate assets remain at risk under Side B coverage.
3. Side C Coverage
Also known as “entity coverage,” Side C coverage protects the company in its own right. Entity coverage may reduce the limits available to protect officers and directors. While Side C coverage insures the organization, its corporate assets may be at risk.
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Why Invest in Board of Directors Insurance
1. Protection for Individuals
One of the main benefits of board of directors insurance is the protection it provides to executives and board members. D&O policies shield certain members of the organization from personal liability in the event of a lawsuit, while also covering the costs of court appearances, legal fees, and settlement costs related to the case.
2. Attracting Talent
D&O insurance demonstrates to the wider industry a deeper commitment to supporting individuals involved in legal matters and conducting business practices in the right way.
3. Protection for the Company
D&O policies will reimburse the company for the defense costs for any directors and officers named in lawsuits, which helps maintain a healthier financial outlook regardless of legal disputes. More protection for the company is provided through Side C coverage.
4. Solidify Risk Management
Developing and operating a risk management strategy is one of the central responsibilities of the board of directors. Governments and other regulatory bodies could file claims against companies or officials for improper conduct regarding consumer protections, environmental practices, workplace health and safety, data security, taxes, and corporate law. D&O insurance lowers your risk profile for certain activities and guards the organization against serious allegations.
5. Improve Compliance
On a similar note, all companies must comply with the current regulations and guidelines for their industry. D&O insurance gives board members and other executives more internal rules to follow on expressed policies or other documents and avoid committing any violations that could lead to lawsuits or other legal matters.
OnBoard Delivers an Integrated D&O Questionnaire
Suppose someone files a claim against a board member, executive, or the company itself. In that case, you need an organized way to collect information and deliver a response to the reported infractions.
OnBoard’s board portal technology accomplishes both tasks. One of our standout features is the integrated D&O Questionnaire that helps directors and legal counsel monitor progress, conduct evaluations on directors and procedures, and fulfill compliance goals. The questionnaires can be customized to fit your company with pre-fills, eSignatures, and attachments.
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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