Do you need D&O? Featured

7:00pm EDT January 26, 2009

While the majority of Fortune 500 companies carry director and officer (D&O) liability insurance for the obvious risks, including securities class-action lawsuits, should your business carry this coverage?

In an environment where litigation is commonplace, you should consider it, particularly if you face increased exposure due to certain business activities, says Jennifer M. Bell, managing director, president and chief operating officer at Aon.

Bell notes that in 2008 there were more than 210 major securities class-action claims filed — a 19 percent increase from the number of claims filed in 2007 and a 76 percent increase over 2006. The average class-action claim settlement for 2008 was $37.5 million, which did not include defense cost.

“Companies face increased exposure when they are completing an initial public offering or private placements and engaging in merger and acquisition or divestiture activity,” says Bell. “But even companies not engaging in these activities do not escape all potential liability.”

Smart Business spoke with Bell about the risks that D&O liability insurance can cover and the hallmarks of a good policy.

Why is D&O insurance important, particularly if a company is not publicly traded?

This insurance is important because it provides coverage directly to the directors and officers in situations where the company is unable to offer personal asset protection for these individuals. Directors and officers have an obligation to a company’s shareholders, the company itself and other third parties. This obligation is present regardless of whether or not the company is publicly traded, privately held or even nonprofit. People who serve as directors and officers are exposed to personal liability as a result of their acts or failure to act with respect to these duties. While a company will typically offer indemnification for this liability, there are potential gaps. The D&O policy is designed to step in a fill these gaps and respond in the event that a claim is made against a director or officer for a wrongful act. The policy provides coverage for defense costs as well as judgments and settlements.

What is the biggest potential exposure that D&O insurance covers?

For public companies, the biggest exposure that a director or officer of a public company faces is a shareholder securities class-action lawsuit. These claims typically allege that the directors and officers made false or misleading statements or failed to disclose facts to the public that resulted in harm to shareholders. For privately held organizations, directors and officers face liability from minority shareholders, family shareholders, customers and suppliers. The largest exposure for a director or officer of a nonprofit organization tends to be employment practices related.

What coverage does D&O insurance offer?

The public company D&O contract typically has three main insuring agreements: coverage for the directors and officers to the extent the company is unable or unwilling to cover them; coverage for the reimbursement of the company’s losses as a result of lawsuits against its directors and officers; and coverage for the company for securities claims made against the company. Privately held company policies and nonprofit D&O policies provide the same basic coverage offered for public companies with the addition of coverage for employment practices liability exposures.

What are some of the hallmarks of good D&O insurance?

All D&O policies are different. However, here is some of the language to look for in a good D&O liability insurance policy:

  • Severability of the application and exclusions: A provision to restrict the insurance company's ability to unjustly blame one insured’s knowledge or actions to another insured.


  • Non rescindable coverage: This provision eliminates the insurance company’s ability to take the contract away as if it never existed. A tactic insurers sometimes utilize in a major claim scenario.


  • Final adjudication in the underlying action language for the personal conduct exclusions: Every primary D&O contract has exclusions for personal conduct such as fraud and illegal profit. However, a D&O policy should be amended such that these exclusions can only be applied if a final judgment in the underlying action has found that there was illegal fraud or profit. If a final judgment has not been made, then the exclusion cannot apply.


  • Dedicated Side A DIC (Difference in Conditions) policy: This policy provides coverage that is solely for the benefit of the directors and officers when there is no indemnification available from the company. This policy provides a ‘last line of defense’ against exposing a director’s or officer’s personal assets to a claim.


  • True worldwide coverage with local policies where appropriate: Foreign countries may not permit nonadmitted insurance to respond in the event that a claim is brought in a foreign jurisdiction against foreign directors and officers. For multinational corporations, careful consideration should be given to purchasing local policies in countries that prohibit nonadmitted insurance. 

JENNIFER M. BELL is the managing director, president and COO of Aon. Reach her at (216) 623-4110 or