Board Of Directors Insurance – Did you know that almost 70% of companies have been sued over actions related to their board of directors? As businesses face more and more legal challenges, it’s necessary to protect their important leaders.
Board directors make key decisions that drive a company’s success, but with those responsibilities come risks, like lawsuits and potential financial losses.
To help guard against these risks, many companies buy board of directors insurance, also called directors and officers (D&O) liability insurance.
This special type of insurance protects directors and officers from losing their personal money if they are sued for their business decisions.
In this article, we will explore the different kinds of coverage available, why companies should buy D&O insurance, recent trends in insurance, and how businesses can explain this protection to their stakeholders.
What Is Board Of Directors Insurance?
Board of directors insurance is a type of insurance that protects the people who run a company. This includes the board of directors and top executives.
Their job is to make big decisions about the company, which sometimes involves taking risks. However, this can also make them personally responsible if things go wrong.
Why Do Directors And Officers Need Insurance?
When a director or officer makes a decision that affects the company, they may be sued if things don’t turn out as planned. This can be a serious situation, especially if the company suffers financially.
If the directors and officers are held personally responsible, they might lose their own money to pay for legal fees or damages. This is where insurance comes in, it helps protect their personal finances.
Types Of Board of Directors Insurance
Board of directors insurance protects board members and their spouses from claims of wrongdoing. These claims can come from investors, employees, vendors, competitors, or other parties. The policy includes three main types of coverage:
A-Side Coverage
This covers board members directly when the company cannot pay for legal defense or other costs.
B-Side Coverage
Also known as corporate reimbursement, this covers the company when it pays for the board’s legal costs and settlements.
C-Side Coverage
Called entity coverage, this protects both the company and the board when they are sued together. It also covers specific claims filed against the company.
What Does Board Of Directors Insurance Cover?
This insurance shields directors from lawsuits and financial risks. It covers:
- Mismanagement of company funds
- False statements about business assets
- Breach of fiduciary duty
- Violations of workplace laws
- Poor corporate governance
However, it does not cover the person suing the board. Lawsuits can come from investors, employees, vendors, or customers.
What Does Board Of Directors Insurance Not Cover?
Each policy has different exclusions based on business needs. However, most policies do not cover:
- Fraud
- Illegal acts or profits
- Personal financial gain
- Lawsuits already settled or ongoing
- Claims made before the policy began
- Physical injury or property damage
Common Reasons For Suing Board Members
Board members can face lawsuits for actions related to their company roles. Common reasons include:
- Financial losses or bankruptcy due to mismanagement
- False information about company assets
- Poor business decisions
- Corporate fraud
- Using company funds for personal expenses
- Theft of intellectual property or clients
- Breaking workplace laws
- Bad governance
Importantly, this insurance does not cover illegal acts. Companies, including non-profits, should have this coverage to protect their board.
How Much Does Board Of Directors Insurance Cost?
The cost depends on factors like company size, industry, financial stability, revenue, and claims history. Older companies often pay less than newer ones. On average, businesses pay about $1,240 per year for coverage.
How To Get Board Of Directors Insurance
Getting coverage is simple. If a board member is accused of misconduct, the company should:
- Notify the director and risk management team
- Report the claim to the insurance provider
- The insurer will review the claim and cover legal defense and financial losses if eligible
This insurance helps businesses protect their leaders and financial stability.
