Finding Your Best D&O Insurance Policy

Officers and directors insurance is truly important in protecting your business and its future. Learn how to find your best directors and officers liability coverage.

Directors and officers insurance — often just called D&O insurance — is a really important way to protect the leadership within your organization. This type of coverage, at its most basic level, protects the personal property of a company’s board members and corporate leadership.

This might sound like something that’s a luxury or only for huge corporations, but it’s truly not. In this guide I’ll take you through everything surrounding D&O insurance, what it covers (and doesn’t), and why it’s necessary for virtually every kind of organization.

What Is D&O Insurance?

D&O insurance protects the personal assets of directors and officers of a company if they are personally sued for decisions they made in the course of their jobs. This insurance covers legal fees, settlements, and other general costs that come about from claims around mismanagement or breach of duties.

Simply put, it protects company leadership from financial loss if things go wrong. It gets more complicated — we’ll get into that in a bit, I promise — but the main point I want to convey is that D&O insurance isn’t there to protect the company, but its leaders.

Why Is D&O Insurance Important for Your Business?

So if it doesn’t protect the company itself, you might ask yourself why it’s important for the company to have. The reason is largely around being able to attract and retain key leaders to your organization.

Think about it: Would you join a company’s board of directors if it meant being potentially and personally liable for something outside your control?

Let’s imagine a worst-case scenario. You join the board of directors of a mid-sized public manufacturing company. Someone reports an environmental violation, leading to a huge fine from the EPA and lawsuits from nearby communities that may have been affected by… let’s call it a chemical spill. Each member of the board of directors is named in those lawsuits for failing to ensure the company was in line with environmental regulations.

In this example, if your company didn’t have D&O insurance, you could be personally on the hook for legal fees, settlements, and any other costs associated with the lawsuits and fines. That could easily put all of your personal assets at risk, including your home, any retirement savings, and other investments.

The Three Sides of D&O Insurance Explained

D&O insurance gets split into what are called three different “sides.” They’re helpfully labeled Side A, Side B, and Side C. Sides A and B are included in virtually all D&O policies, and Side C coverage is nearly always found with companies that have gone public. (Note: If you're curious about how these three "sides" work for a SPAC, you'll want to reference our dedicated guide.)

Side A Coverage: Protecting Individuals

Officers and directors insurance’s Side A offers protection when the company can’t indemnify (that is to say, cover) its leadership. Sometimes companies may be unable or unwilling to reimburse legal costs. One clear example would be in the case of a bankruptcy, when the company simply may not have the money available to assist.

Side B Coverage: Reimbursing the Company

Side B coverage, on the other hand, applies when the company can reimburse directors and officers for their legal costs upfront. This type of policy then reimburses the company for its costs (less things like a deductible or a retention) up to the limits of the insurance. If the CFO of a company were sued for mismanagement, for example, and the company fronted the legal fees to fight the suit, Side B coverage would make the company whole.

Side C Coverage: Protecting the Entity Itself

Side C is often known as entity coverage. This type of insurance is not always included in D&O insurance policies, but it’s really important for public companies to have this — so make sure you do. This coverage protects the company when there’s a claim that’s generally around securities issues and filed by shareholders.

Let’s say your (public) company is sued by a group of shareholders who allege that misleading financial statements caused stock prices to fall. Side C coverage would generally pay for the company’s legal defenses and any settlements (or judgments) that come about from the lawsuit.

It’s a little bit strange to consider Side C as “D&O” insurance, given that neither directors nor officers are actually covered by it. This coverage was added later as companies started to face direct lawsuits relating to securities claims.

Side A Difference-in-Conditions (DIC) Policies: An Extra Layer of Protection

Beyond the three types discussed, there’s another supplemental insurance type that fits under the directors and officers liability insurance coverage umbrella. A Side A Difference-in-Conditions, or just DIC, policy gives your company’s directors and officers an additional level of protection. It works similar in some ways to umbrella liability insurance.

If your Side A policy limits are reached, a DIC policy can step in to cover any “overage” (provided it falls within your DIC policy’s limits). But it can also offer broader coverage with fewer exclusions, too, giving your leadership team protection even in an absolutely dire, worst-case scenario.

3 Key Benefits of D&O Insurance for Public Companies

There are way more than three benefits for a public company having directors and officers liability coverage, but three is a good place to start.

1. Attract and Retain Key Leaders: Protecting your directors and officers with good D&O coverage is a great way to get strong leaders to come to — and stay — at your company. Few people want to risk their personal assets as part of their work, and the ones that do? I’d have some questions for them.
2. Cover Legal Costs and Settlements: It’s not just about protecting your officers and your directors. The right amount of D&O insurance protects your company as a whole. Lawsuits can be extremely costly, and let’s face it: We live in a pretty litigious world today. Having protection is essential to making sure your company can survive.
3. Enhance Investor Confidence: Because your company is public, you need to do everything you can to ensure you are doing everything you can to minimize risk and position yourself as a worthwhile investment. Not taking D&O insurance seriously can undo any trust and confidence that investors may have in your business — especially once you hit a speedbump and need to rely on it.

3 Common Misconceptions About D&O Insurance

There are some pretty common beliefs about directors and officers liability insurance coverage, so let’s dispel three of them.

1. It Covers All Legal Claims: It sure doesn’t. While D&O policies cover a lot of claims against your company’s directors and officers, there is one big exclusion: It won’t cover intentional misconduct like fraud, embezzlement, insider trading, and any other illegal acts that may be taken by someone in a director or officer role. Note that D&O insurance absolutely will step in if someone gets accused of a crime, but if they’re found guilty, expect to pay back all the reimbursed legal costs and penalties.
2. Only Large Companies Need It: Regardless of its size, any company faces a lot of risks. Sure, larger companies may face more risks, but even a small lawsuit or issue at a small company can lead to huge financial issues — and even threaten its ability to survive. D&O insurance is a key way to weather these storms. This goes doubly true for public companies, who face significant risk in the form of shareholder lawsuits.
3. It Only Protects Directors and Officers: If you’ve paid attention up until now, you’ll know that one type of coverage — Side C — covers the company itself in the case of a shareholder suit. And Side B coverage makes a company whole in case they need to cough up costs as part of protecting directors and officers.

Legal Exclusions in D&O Insurance Policies

Like any insurance policy, there are plenty of things that are excluded from coverage. Here are five, but I’d note that these aren’t always excluded — every D&O policy may differ in what’s covered and what’s not. These five are nearly always excluded, though.

1. Fraud
2. Criminal acts
3. Bodily injury
4. Property damage
5. Pending litigation

None of these are too surprising, I don’t think, but just keep in mind that your D&O insurance is completely separate from any property liability insurance, and you can’t expect a new policy to cover a claim made against you before the insurance was issued.

Factors That Affect D&O Insurance Premiums

Like with virtually any type of insurance, there are a huge number of factors that impact the premiums you’ll pay to cover your officers and directors. I’ll describe four main factors and give a more extensive list afterward.

First, not all industries were created equally, at least in terms of risks (perceived or real). Don’t be surprised when D&O insurance for a healthcare company costs far more than the same policy for a well-established educational institution.

Second, your claims history matters a great deal. If your company has a history of lawsuits being filed against it, expect to pay for that with your premiums.

Third, your company’s size (both in terms of employee headcount and revenue) can make a world of difference. Typically, smaller companies have smaller premiums (provided the other factors are the same).

Finally, the insurance company you go with also matters a lot. Every insurer has their own underwriting criteria. What one finds super risky, another may be more comfortable with, and the pricing you see will reflect that.

That’s why it’s really important to take your insurance needs to not just one or two insurance companies, but to as many as possible. If that sounds particularly onerous, don’t worry: It doesn’t have to be. In mid-2024, we shopped our policy around through our Janover Insurance service, and we ended up saving about 25% on our annual premiums. (Quick sales pitch: We can get you a free quote from leading insurers; just send us some details here.)

Anyway, although those four factors are by far the largest, insurance companies will also price you higher (or lower) based on:

1. Board turnover and leadership stability
2. Corporate governance practices
3. Risk management procedures
4. Mergers and acquisitions
5. Regulatory environment
6. Financial performance
7. External audit findings
8. Litigation environment
9. Shareholder structure

Steps to Get the Right D&O Insurance for Your Company

Now that you’ve read up on D&O insurance and what’s covered (and isn’t), you’ll need to figure out your best path to your best policy. There are three steps along the way you’ll need to consider.

Assess Your Company’s Risk Profile

You don’t want to be surprised, so do your homework on the risks your company has or faces and take steps to address them. Your industry and company size aren’t things you can really (easily) change, but there are many factors you can. For example, enhancing risk management systems, implementing stronger governance practices, and being on top of regulatory compliance can be great ways to reduce your risks, and this will help you get the right coverage you need.

Cast a Wide Net to Find the Best Policy

Second, don’t limit your search to a single insurance company. Just because one insurer handles your property insurance doesn’t mean they’re well suited for your D&O policy. Use a platform like Janover Insurance, or at the very least speak with a broker or two. The more options you have in front of you, the more likely you are to find an insurer that can provide the coverage you need.

Customize Coverage for the Best Protection

Going with the Cadillac of D&O insurance isn’t necessarily the best strategy. Look, it’s great and smart to cover your risks as well as you can, but at some point, you need to weigh the costs with the risks. If you go for the highest limits, you’ll pay quite a bit more for coverage, and depending on your business, those extra costs could be completely unnecessary.

Part of customizing your coverage is understanding what risks your company needs the most protection from (and to what extent) and planning accordingly. It’s good to have enough coverage to absorb unexpected liability costs, especially in certain higher-risk industries, of course, but think it through in terms of what’s really necessary and what isn’t as palatable in terms of expenses.

Conclusion: Why Every Business Needs D&O Insurance

Regardless of how much or little insurance you may believe you need, every business should seriously consider getting a comprehensive directors & officers insurance policy. And going beyond just considering, it’s my firm belief that 100% of public companies absolutely require policies (covering Sides A, B, and C) to make sure they’re prepared for the unexpected.

Still, finding the right policy that covers the right things (at the right cost) can be a huge challenge. At Janover Insurance, we’re more than happy to help you assess your needs and get a free quote in front of you.