How does Directors and Officers (D&O) liability insurance work?


Lawsuits against officers and directors of big corporations have become commonplace in recent years. Investors, workers, and even other companies can sue a corporation's director and officers for corporate mismanagement. Directors and Officers liability insurance, commonly referred to as D&O insurance, has been designed specifically to provide financial protection in the event that mismanagement claims are made.

Characteristics of Directors and Officers Liability Insurance

The majority of D&O insurance policies share the following common features:

  • A-Side Coverage, also called D&O personal liability, indemnifies directly directors and officers by paying damages to the injured party on behalf of the director or officers if they have been held accountable for committing a wrongful act. D&O personal liability coverage comes in where the corporation cannot indemnify the director or officers held liable. In order for an insurance provider to pay damages on behalf of the insured, the definition of a 'wrongful act' has to be met, and this definition differs from company to company - from errors and omissions by the corporation as a whole to errors and omissions by the director or officers.
  • Corporate reimbursement coverage, also referred to as B-Side Coverage, applies when a corporation has an obligation to pay damages incurred by the corporation's officer or director as a result of their wrongful acts. D&O B-side Coverage indemnifies the corporation if it pays damages on behalf of the director or officer.
  • Entity Securities Coverage, or insuring agreement C, is an optional insuring agreement protecting a corporation against legal liability which might arise out of the mismanagement of directors or officers in the event that the corporation is named as a co-defendant in a liability lawsuit.

Most D&O insurance policies exclude bodily injury and property damage, intentional dishonesty and discrimination by the insured, defamation of character, violation of the ERISA law.

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