How Does D&O Insurance Protect Executives?

Business professionals who serve on the board of directors or as officers are often thought of as being outside the risk of the company. However, there are times when they can be held liable for a wide range of mistakes or acts of negligence. Much like any other management professional or business owner, directors and officers require some level of professional liability insurance to protect them from lawsuits filed against them for perceived acts of negligence. D&O insurance provides this protection.

Often a key component of a business insurance plan for directors and officers, this form of professional liability insurance covers these individuals within for-profit companies, as well as not-for-profit organizations, privately held companies and educational institutions. It aids in protecting these individuals from claims made against them while they serve on the board.

The policy works much like a management errors and omissions policy works. Specifically, it covers directors and officers from claims made against them, such as decisions that have adverse financial consequences or lead to a significant loss. Any person serving on the board of directors could face such claims from other members of the company or employees for many reasons.

A key component of D&O insurance is the "shrinking limits" provision. One of the most important parts of this type of professional liability insurance is the defense provided through this coverage. With shrinking limits, the defense costs reduce the limits of the policy. This is very different than other forms of business insurance for liability protection (such as commercial general liability) where defense costs are separate from liability claims.

These policies are complex but often contain a few other important features:

• The policy does not provide an explicit duty of the insurer to defend the individual in a for-profit business.
  
  
• The policy is claims-based, which means it provides limited protection or benefits when a claim is made.
  
  
• It does not include bodily injury or property damage, but usually only covers monetary damage.

Keeping these key components in mind, businesses with a board of directors and officers should seek out a comprehensive business insurance plan that protects against these risks. This policy is often in addition to other forms of professional liability insurance, not a substitute for them.