Directors and Officers (D&O) Insurance

What is D&O insurance?

Directors and officers (D&O) insurance protects the people who lead an organization, such as board members, directors, officers and sometimes managers, when they are sued over decisions they made while running it. Claims might allege mismanagement, breach of duty, conflicts of interest, misuse of funds or failure to follow laws and bylaws. D&O pays for legal defense and, depending on the policy, settlements or judgments.

Leaders can be sued personally, even when they acted in good faith. D&O helps protect both their personal assets and the organization's balance sheet.

How D&O coverage is structured: Side A, B and C

Most D&O policies have three parts:

• Side A covers directors and officers personally when the organization can't or won't pay for them, for example if it is insolvent or not allowed to indemnify them.
• Side B reimburses the organization when it pays to defend or indemnify its directors and officers.
• Side C, often called "entity coverage", covers the organization itself when it is named in certain claims. For private companies and nonprofits, entity coverage is often broader than for public companies.

Policy wording varies, so read which sides are included and how the limit is shared between them.

Who needs D&O insurance?

• Nonprofits and charities. Volunteer board members can be sued by donors, members, employees, vendors or regulators. Many people won't join a board without D&O. See our nonprofit insurance guide.
• Churches and religious organizations with boards, trustees or elders. See church insurance.
• Small and private businesses with investors, a board, or plans to raise money. Investors, lenders or partners may sue over decisions.
• LLCs and closely held companies with multiple owners or managers. Owner disputes are a common source of claims. See LLC insurance.
• Childcare centers, associations and community groups whose boards make funding and safety decisions. See daycare insurance.

Forming an LLC or corporation limits personal liability for many business debts, but it does not stop people from suing directors and officers for their own decisions.

Common D&O claims

Example: A nonprofit's board cancels a program, and a group of donors sues, claiming the board misused restricted gifts. D&O can pay the board's defense.

Example: Minority owners of a small company sue the managing owner, claiming a sale of assets was below market value. D&O can respond to the claim against the manager.

Example: A state agency investigates a charity's reporting. Some D&O policies cover defense costs for certain regulatory investigations.

What D&O usually doesn't cover

• Fraud, criminal or intentional wrongdoing, once proven. Many policies pay defense costs until a final finding of fraud.
• Illegal personal profit or payments a person wasn't legally entitled to.
• Bodily injury and property damage (that's general liability).
• Professional service mistakes for clients (that's professional liability / E&O).
• Employment claims such as discrimination or wrongful termination, unless the policy includes employment practices liability. Many nonprofit D&O packages bundle EPLI; check yours.
• Prior or pending claims known before the policy started.
• Insured vs. insured claims, such as one director suing another, are often excluded or limited.

D&O vs. E&O vs. EPLI

Many small organizations buy these together in a management liability package.

Claims-made coverage

D&O is almost always written on a claims-made basis. The policy that is active when the claim is made responds, not the policy that was active when the decision happened. That makes two things important:

• Keep coverage continuous so there are no gaps.
• Know your retroactive date and extended reporting (tail) options if you close the organization, merge or stop buying coverage.

The duties D&O claims are based on

Directors and officers owe duties to the organization they lead. In general terms these include a duty of care (making informed, reasonable decisions), a duty of loyalty (putting the organization ahead of personal interests and handling conflicts of interest properly), and, for nonprofits, a duty of obedience (following the mission, bylaws and applicable laws). Most D&O lawsuits allege that one of these duties was breached.

Good governance lowers the risk of a claim and helps if one is filed:

• Keep accurate minutes that show how decisions were made.
• Adopt and follow a written conflict-of-interest policy.
• Review financial statements regularly and ask questions.
• Follow donor restrictions on gifts and grants.
• Get professional advice (legal, accounting) for major decisions.

D&O for small private businesses

Small companies sometimes assume D&O is only for large corporations. In practice, claims against small private businesses often come from investors, lenders, co-owners, competitors, vendors or customers, and they can be expensive to defend even when they lack merit. Raising outside money, adding a board, or planning a sale are common moments when owners review D&O coverage. Investors may ask about it before they fund the business.

How much does D&O insurance cost?

We don't publish a median for D&O, because prices vary widely. Insurers usually consider:

• Organization type (nonprofit, private company), size and revenue
• Number of board members and employees
• Financial health and funding sources
• Industry and claims history
• Limits, retention (deductible) and whether EPLI is included

Small nonprofits can often buy D&O as part of a package. Compare quotes from licensed insurers or an independent agent, and read the exclusions carefully.

Tips before you buy

• Confirm whether Side A, B and C are all included and how the limit is shared.
• Check whether employees, volunteers and committee members count as insureds.
• Ask whether defense costs reduce the limit.
• Look for regulatory investigation coverage.
• Review your bylaws' indemnification clause with your attorney.