Guide to Directors and Officers (D&O) Liability Insurance

Even if they do their jobs well, your top managers — and you — could get sued

By Greg Brown

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Corporate counsel will tell you: The more money your firm pulls in, the more people will come out of the woodwork to claim a part of it. Shareholders, former employees, current employees, vendors and suppliers, creditors, even competitors.

General business insurance won't protect against claims that hold directors personally responsible for company actions (like in the Enron or WorldCom cases). Enter directors and officers (D&O) insurance. Attracting top management talent and even decent outside directors requires more than cash and benefits. If they're smart, your prospects will be checking to see how much coverage for them is in the deal.

Here are some tips on keeping your management team focused by transferring the risk using D&O coverage:

Action Steps
The best contacts and resources to help you get it done

Do you need D&O coverage?

As you might expect, it's not as simple as buying coverage and moving on. If you company is not required by state law to defend directors, then coverage — even if you buy it — won't apply.

I recommend: Axis, an insurer focused on the real-estate industry, has good, clear descriptions of what D&O really does, as well as explanations of similar but cheaper policies which might be a better fit for small business and professionals, like employment practices liability insurance (hiring and firing disputes) and errors & omissions (mistakes made giving advice, perhaps as an architect or realtor).

Benchmark your company

Get an idea of the real numbers to figure out where your company fits into the D&O scheme.

I recommend: Tillinghast, part of management recruiting firm Towers Perrin, does an annual review of the sector (PDF file).

Review D&O plans from the big league insurers

Your local bank or regular agent will be happy to talk business liability insurance, but chances are they don't D&O. In part, that's because it's an expensive product and hard to sell to small business.

I recommend: AIG, Chubb and Ace Limited are among the largest providers.

Find coverage through your trade association

Often, the best deals on business liability insurance are through a trade or professional associations. If you don't already belong, it might be a good time to join.

I recommend: Find an association through Weddle's Association Directory online.

Tips & Tactics
Helpful advice for making the most of this Guide

New U.S. securities legislation, especially Sarbanes-Oxley, has made D&O a hot topic among companies that trade. If you are considering going public, talk to your lawyers about coverage well in advance.
D&O coverage is particularly pertinent when companies collapse, leaving no assets behind to defend directors. If your industry is shaky or high-risk, high-reward, potential managers will be particularly concerned about getting coverage.
While most common among larger, public companies, non-profits worry too about coverage, since board members tend to be wealthy, high-profile execs. If you volunteer to sit on a charity board, ask about what D&O it carries for your work there.

The official source of Directors and Officers (D&O) Liability Insurance is
the Directors and Officers Insurance page at Business.com