D&O Insurance: The Least-Known Small Business Insurance Explained

Directors and officers (D&O) liability insurance is the “most discussed and least understood” form of insurance, writes Hartmut Mai, global head of financial lines at Allianz. Despite being offered by small business insurance providers

Regardless, there’s no denying the growing demand for this type of insurance. According to insurance analytics firm Advisen, while per-occurrence limits in D&O insurance dropped by 19 percent in 2012, the amount of written premiums increased to $2.154 million from $2.086 million just two years ago. The market continues to enjoy demand mostly from companies with revenues of $300 million and up.

It’s only fitting to know how D&O insurance really works. Robert Anderson breaks this perplexing insurance down to its basics.

Indemnity Protection

Being at the tip of the spear, directors and executive officers make some of the most important decisions in any organization. The consequences of their decisions will surely be charged on their tabs. D&O insurance protects them from indemnity or compensation. In many cases, indemnity can be the result of legal liability, namely breach of duty or white-collar crime.

D&O insurance was introduced in 1897 in Germany in response to new corporate laws like the “Aktienrecht” or law of obligations. However, these were largely ignored until the 1930s during the Wall Street crash of 1929, during which London-based companies scrambled to get one. D&O insurance didn’t enter the U.S. market until the 1970s.

There are three types of D&O insurance. Side A, the most basic of the three, covers directors’ and officers’ personal assets. Side B covers the company’s assets in case the company can’t indemnify the directors and officers. Side C is the most specific and covers a company’s assets under securities claims.

Going Bare

Companies without D&O insurance (or any insurance for that matter) are said to “go bare”. Insurance, after all, can be a hefty investment. Anderson suggests purchasing D&O insurance when enough funds are available and when the company is hiring outside directors and officers.

It should be noted, however, that D&O insurance does not grant criminal immunity. In fact, D&O insurance provides no cover for criminal activities like deliberate non-compliance, illegal remuneration, and crimes against other people and property.

Yet overall, D&O insurance can be a reliable protective screen for business owners and high-ranking staff members. In many cases, offering D&O liability coverage can attract prospective directors and officers to your company or keep existing ones from leaving. A reliable small business insurance agency like InsureYourCompany.com can offer for- and not-for-profit companies D&O insurance.

(Source: “Considering D&O Insurance,” Entrepreneurship.org)