Directors and Officers (D&O) liability insurance can cover legal defense fees, settlements, and other costs from liability claims made against an organization’s owners, directors, and other officers for alleged wrongful acts or decisions. D&O coverage enables company leaders to make decisions on behalf of the company without fear of personal loss from legal claims. General liability and umbrella insurance do not cover claims made personally against directors and officers. D&O coverage fills this gap. This protection also helps attract and retain high-quality directors and officers. As a result, D&O insurance should be part of every company’s risk management program.

Lawsuits against directors and officers don’t just target public companies. Executives of private, small, and even family-owned businesses may also be held personally liable for company-related actions, breaches, or decisions that cause harm to the organization, its investors, or other stakeholders. 

The Small Business Administration calculated that for every $1 million a business earns, the organization may spend $20,000 on lawsuits. Even if a lawsuit does not go to trial, the cost of mounting a legal defense can cripple an organization — and the smaller the company, the greater the comparative economic burden.

"With the average D&O lawsuit costing over $120,000, the impact can be catastrophic for small businesses," says Patrick Mitchell, Executive Risks Lead at Coalition

Many executives at private companies may not even realize that D&O coverage is an option for them.

“Nearly a third of small business executives didn’t purchase management liability coverage because they didn’t realize coverage was available for them.” 

— Coalition Executive Risks Survey, Wakefield Research, 20211

In some ways, directors and officers of privately held companies may actually be more exposed to personal litigation than executives at larger, publicly-held organizations. That’s because they are typically more directly involved in a broad range of company decisions — and therefore may be named individually in almost any company litigation.

Furthermore, private companies, especially small businesses, often lack the legal resources needed to prevent, prepare for, or defend company leaders from such actions. D&O insurance for private companies can not only cover costs associated with a defense, but also fast-track engagement with a skilled legal team. This not only improves success, it enables your clients’ executives to stay focused on running their business rather than scrambling for legal representation.

Due to their complex nature and reliance on outside investors, private technology companies have become increasingly targeted by lawsuits. Such cases are also common against private equity firms, investment funds, and middle-market lenders. Recent legal actions against executives at private companies have included:

• Antitrust claims and regulatory actions

• Internal price-fixing

• Breaches of intellectual property

• Misappropriation of trade secrets

• Misuse of company funds

• Securities fraud

• Misrepresentation of proprietary technology

• Post-bankruptcy claims from creditors

• Breach of contract

• Consumer protection

• Occupational health and safety (OSHA) violations Environmental harm

An organization’s directors also have the fiduciary duty of loyalty to monitor a company’s operations. An increasingly common type of litigation against company leaders involves a breach of the duty of oversight.

D&O insurance pays for defense costs and settlements incurred in court cases brought about by allegations of wrongful acts and financial losses in which an individual or group is held personally liable. D&O insurance policies typically include:

• Protection for the insured executives from losses, when the company is unable to provide indemnification. (This is known as Side A coverage.)

• Protection for the insured executives from losses when the company does grant indemnification. (This is known as Side B coverage.)

• Protection for the company itself, in the event that it is named along with the individual(s) in the lawsuit. (This is known as Side C coverage or Entity Coverage.)

• Additional policy extensions can provide similar protections for executives sitting on the boards of outside companies.

• Coverage may also be afforded to retired company directors, providing added peace of mind.

Like all insurance, D&O insurance has restrictions. Coverage doesn’t include payment for expenses arising due to any kind of criminal activities, punitive damages, and intentional wrong doings. This includes illegal actions that result in personal gain or fraud. However, insurance does include defense costs until the final judgment proves guilt. For example, D&O insurance typically doesn’t cover: 

• Responsibilities, obligations, or duties imposed by ERISA: Covered by Fiduciary Liability insurance 

• Accusations of discrimination or harassment by employees: Covered by Employment Practices Liability insurance (EPL) (available with Coalition) 

• Cyber-related losses as the result of hacking, malware, ransomware, etc.: Covered by Cyber Liability insurance 

Bodily injury and property damage claims.

Private Companies

Industry: Consulting Employer size: 1-10 employees Revenue: $500,000-$1M A consulting group agreed to pay a mid six-figure amount to settle a claim by a competitor alleging breach of contract, unfair competition, tortious interference, misrepresentation, and copyright infringement. The lawsuit arose out of an agreement in which the competitor granted the consulting group the right to use proprietary technology in exchange for a share of certain profits. However, a dispute arose regarding the use of such technology and which profits were derived from its use.

Industry: Marketing Employer size: Unknown Revenue: Unknown Directors and officers of a marketing company were sued in Florida by a minority shareholder alleging that the directors and officers were diverting the company’s revenue and assets to other companies they owned. The directors and officers settled the lawsuit for a confidential amount and the costs incurred to defend the lawsuit totaled approximately $125,000.

Industry: Real Estate Employer size: 1-10 employees Revenue: $100,000-500,000 A real estate developer agreed to pay a seven-figure amount to settle a claim by a homeowners association which alleged that the developer failed to adequately manage the company before it was turned over to homeowners. The lawsuit generally alleged that the developer failed to collect sufficient condominium fees to ensure adequate capital reserves and failed to maintain certain common areas.

Industry: Construction Employer size: 15 employees Revenue: Unknown A construction company was sued by a competitor for allegedly diverting a potential contract/ business opportunity. The lawsuit asserted claims for tortious interference with contract and sought damages reflecting, among other things, lost profits. The case was settled for a confidential amount and the costs incurred to defend the claim totaled approximately $200,000.

Company leaders of all sizes and types of organizations are facing an increasing risk of lawsuits holding them personally liable for actions and decisions. As a broker, you can protect your clients with D&O coverage from Coalition — the leading provider of commercial insurance for small and midsize businesses. 

Coalition’s D&O insurance products are backed by Zurich’s financial strength and stability, including its A+ rating from A.M. Best.