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D&O insurance policies offer liability cover for company managers to protect them from claims which may arise from the decisions and actions taken within the scope of their regular duties. As such, D&O insurance has become a regular part of companies risk management.
Companies purchase D&O cover because managers can make mistakes. D&O coverage includes financial protection for managers against the consequences of actual or alleged “wrongful acts”. Policies cover the personal liability of company directors but also the reimbursement of the insured company in case it has paid the claim of a third party on behalf of its managers in order to protect them.
Coverage is usually for current, future and past directors and officers of a company and its subsidiaries. D&O insurance grants cover on a claims-made basis. This means that claims are only covered if they are made while the policy is in effect or within a contractually agreed extended reporting period, which can extend up to another 72 months or even longer in some countries.
Coverage does not include fraudulent, criminal or intentional non-compliant acts or cases where directors obtained illegal remuneration, or acted for personal profit.
The structure of a D&O insurance policy depends on which of three insuring agreements are purchased (ABC policies are generally chosen, as these are standard form policies for publicly listed companies; for private or non-profit companies, only AB policies would be used) [see table].
| Cover | Description | Who is the insure? | What is at risk? |
|---|---|---|---|
| Side A | Protects assets of individual directors and officers for claims where the company is not legally or financially able to fund indemnification | Individual Officer | His/Her Personal Assets |
| Side B | Reimburses public or private company to the extent that it grants indemnification and advances legal fees on behalf of directors/officers | Company | Its Corporate Assets |
| Side C | Extends cover for public company (the entity, not individuals) for securities claims only | Company | Its Corporate Assets |
Directors and officers are confronted with an increasing peril that their company may not be able to reimburse them for loss. An extra layer of defense to personal funds can be secured by purchasing Side A cover, which insures directors and officers only (not the company) when indemnification is unavailable.
Often not enough coverage is bought for the risk, so a major trend is for more Side A cover to be purchased in order for an individual officer to protect personal assets. D&O cover has become a regular cover for large multinational companies, but all sizes of organizations – public, private or non-profit – have potential exposures