Leading officers and the board of directors of corporation are frequently named when an outside party or the government sues the given corporation in civil action. Because the cost of such litigation can be extremely expensive but doesn’t always occur on a regular basis, many executives take out insurance coverage to pay for such costs if they find themselves on the receiving end of a lawsuit.
Directors & Officers Insurance, many times referred to as D&O, provides a type financial protection and liability insurance for such individuals tied to a corporation. By paying a regular premium, the insurance company providing the coverage takes on the risk that should the manager be involved in a lawsuit the insurer will pay for the respective attorney and representation. In many ways the coverage works the same ways as regular business insurance or car insurance where the original cost is based on potential risk. Where a lawsuit does occur, the then the insurance provider has to take on the cost of the representation.
Many D&O policies have limitations because insurers obviously don’t want to be responsible for representing every possible act. Where, for example, a client has committed a criminal act, many insurers will limit their coverage in contracts to avoid cost responsibility. Another common limitation tends to be total cost paid. Insurers don’t want to be on the hook for the entire expense of a large case, so terms capping total costs paid tend to be used as well.
Directors & officers insurance should not be confused with individual professional liability coverage even though the insurance benefits can be very much the same in practice. D&O coverage is specific to corporations as their own legal entities, protecting the executive management as part of the organization. As a result, if the corporation decides to oust a director or terminate an executive officer, then that individual has to obtain his own legal coverage. He will no longer be covered.
Unlike other forms of insurance, however, D&O insurance actually pays the company for the cost of legal representation rather than hiring the attorney directly. This type of insurance is known as indemnification and keeps the company financial whole despite being sued. As a result, it’s usually the company itself that pays for and provides D&O insurance for its executives versus the individuals.