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Understanding your Risk Landscape

Directors and Officers Liability (D&O) - For Small to Medium Enterprises (SME’s) and Start-ups

Lawsuits against public, private, or non-profit organizations and their directors and officers can disrupt business, damage reputations, and be financially devastating.
Person's name and title

By Noela Kenna , 

AVP, Consumer and Commercial Leader

01/09/2022 · 3-minute read

Directors and Officers Liability

Public, private, and non-profit companies face complex exposures, which can make their directors and officers targets of litigation. Lawsuits against public, private, or non-profit organizations and their directors and officers can disrupt business, damage reputations, and be financially devastating. Claims accusing directors and officers of wrongdoing in their management roles can come from many sources, including shareholders, customers, suppliers, regulators, and creditors. Events that can trigger D&O litigation are also broad.

The role of the director or officer comes laden with personal risk.  Individuals taking in these positions place themselves in the position for intense attention from regulators, shareholders and the public. 

From cyber-related losses, to financial disclosures, to the response to pandemics and natural disasters, organizations and management teams face a growing list of liability exposures — across all industries.

D&O liability insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization. D&O liability insurance is an effective way to protect your organization and your directors' and officers' personal assets. It can also cover the legal fees and other costs the organization may incur as a result of such a suit. 

In recent years, this risk has increased significantly as a result of technological change, greater regulation and requirements, enhanced stockholder scrutiny and amplified governmental oversight.

What are the most common risks for directors and officers?

Liability exposures can vary for directors and officers of public companies and those of private or non-profit organizations.

Public company directors and officers typically face more scrutiny of their management decisions due to regulatory and legal requirements to disclose financial and operational information. While private and non-profit organizations do not have the same disclosure requirements, they can face lawsuits claiming wrongdoing or harm from customers, vendors, regulators, or other sources.

Therefore, securities lawsuits by shareholders or regulators are a common type of D&O risk for public companies, whereas employment practices lawsuits are a common exposure for private companies and non-profits. Directors and officers of all organizations (public, private, non-profit) can however face liability exposure for cyber-related losses, such as data breaches.

What does D&O insurance cover?

D&O liability insurance typically contains three sectors, often referred to as "sides." Each side offers a different coverage component, making it critical to understand all three:

  • Side A: Personal Asset Protection
    This is solely for directors and officers. This coverage is initiated if the organization is unable or unwilling to indemnify them. This element of coverage can be critical in order to attract qualified directors and officers.
  • Side B: Company Reimbursement coverage
    Insures your organization for the covered costs of indemnifying your directors and officers.
  • Side C: Entity coverage
    Offers balance sheet protection when the organization itself is named in litigation. This is generally limited to securities claims for public companies.

Why do companies need D&O liability insurance?

D&O liability insurance offers companies more than executive protection. It also helps with:

  • Legal cost coverage
  • Attract potential investors
  • Bankruptcy protection
  • Cyber breaches
  • Attract better talent

What other risks do directors and officers face?

Various movements and stakeholders are promoting corporate accountability for environmental, social, and governance (ESG) activities. These often shine a spotlight on organizational practices, including:

  • Operations with high-carbon emissions
  • Use of renewable energy sources
  • Human rights and labor practices in developing countries
  • Board diversity
  • Responsible investment strategies
  • Executive compensation

This can add accountability pressure on directors and officers for the impact of their decisions, which could lead to regulatory and legislative action, litigation, or force a business to amend its plans and practices.

Marsh only acts as an intermediary in concluding insurance contract and therefore is not the capacity provider/ insurance carrier.

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