What Is D&O Insurance?
Directors and Officers (D&O) liability insurance protects corporate directors, officers, and sometimes the company itself from claims arising from management decisions and actions. Unlike general liability insurance, D&O coverage addresses wrongful acts in the management of the organization rather than bodily injury or property damage.
As a director or officer, you owe fiduciary duties to shareholders, employees, and other stakeholders. When someone believes those duties were breached, they may sue you personally. Without D&O insurance, you could be personally liable for defense costs and damages that can easily reach millions of dollars.
🎯 Who D&O Insurance Protects
- Directors: Board members who oversee corporate governance
- Officers: CEO, CFO, COO, and other executive management
- The company: When it indemnifies directors/officers or faces securities claims
- Employees: Sometimes extended to management-level employees
- Outside directors: Independent board members serving in advisory capacity
The Three Parts of D&O Coverage
D&O policies are typically divided into three coverage parts, each serving different purposes:
Side A Coverage Personal Protection
Covers individual directors and officers when the company cannot or will not indemnify them. This is the most important coverage for personal protection.
- Applies when company is bankrupt and cannot indemnify
- Applies when company is legally prohibited from indemnifying
- Applies to derivative suits where company is the plaintiff
- No deductible typically applies to Side A claims
- "Side A DIC" (Difference in Conditions) provides extra protection
Side B Coverage Company Reimbursement
Reimburses the company when it indemnifies directors and officers for covered claims. Most claims are paid under Side B because companies typically indemnify their leadership.
- Company pays D&O defense costs and settlements
- Insurance reimburses the company
- Subject to corporate retention (deductible)
- Most common coverage trigger in practice
Side C Coverage Entity Coverage
Covers the company itself for certain claims, most commonly securities claims. Not all D&O policies include Side C coverage.
- Securities claims against the company
- Employment practices claims (if included)
- Subject to entity retention
- Shares limits with A and B (can erode personal coverage)
⚠ Watch Out: Limits Erosion
When all three coverages share the same policy limits, entity claims (Side C) can erode or exhaust the limits, leaving nothing for individual directors and officers. Consider separate Side A excess coverage or dedicated Side A limits to protect personal assets.
What D&O Insurance Covers
Common Covered Claims
- Breach of fiduciary duty: Failure to act in company's best interests
- Mismanagement: Poor business decisions causing losses
- Securities claims: Misleading statements to investors
- Shareholder derivative suits: Shareholders suing on company's behalf
- Regulatory investigations: SEC, DOJ, and other agency proceedings
- Creditor claims: Especially in bankruptcy situations
- Employment practices: Wrongful termination, discrimination (if included)
- M&A litigation: Claims arising from mergers and acquisitions
Typical Exclusions
- Fraud and criminal acts: Deliberate dishonesty (usually with final adjudication requirement)
- Personal profit: Illegal personal gain
- Insured vs. insured: Claims between company insiders
- Prior knowledge: Known circumstances before policy inception
- Bodily injury/property damage: Covered by other policies
- ERISA claims: Pension/benefit plan fiduciary liability
- Pollution: Environmental liability claims
- Professional services: Covered by E&O instead
California D&O Considerations
CACalifornia corporate law affects D&O coverage in several important ways:
- Indemnification limits: Cal. Corp. Code Section 317 governs when companies can indemnify D&Os
- Mandatory indemnification: California requires indemnification of D&Os who are wholly successful in defense
- Advancement of expenses: Companies may advance defense costs before final disposition
- Shareholder derivative suits: Cal. Corp. Code Section 800 sets specific procedural requirements
- Securities litigation: Many securities class actions filed in California state or federal courts
- Insurance regulations: Cal. Ins. Code requires fair claims handling for D&O claims
Who Files D&O Claims?
Understanding who brings D&O claims helps you assess your risk exposure:
| Claimant Type | Common Allegations | Coverage Part |
|---|---|---|
| Shareholders | Securities fraud, breach of fiduciary duty, mismanagement | A, B, C |
| Employees | Wrongful termination, discrimination, harassment | A, B, C |
| Regulators (SEC, DOJ) | Securities violations, accounting fraud, insider trading | A, B |
| Creditors | Fraudulent transfer, deepening insolvency (bankruptcy) | A |
| Competitors | Antitrust, unfair competition, tortious interference | A, B, C |
| Customers/Vendors | Contract disputes with D&O involvement | Varies |
Common D&O Claim Scenarios
Securities Class Actions
When a company's stock price drops significantly, plaintiff's attorneys often file class action lawsuits alleging the company made false or misleading statements. These claims target the company (Side C) and individual executives who signed SEC filings (Sides A and B).
Derivative Suits
Shareholders can sue directors on behalf of the company for breach of fiduciary duty. Because the company is technically the plaintiff, it usually cannot indemnify the directors - making Side A coverage critical.
Bankruptcy Claims
When companies become insolvent, creditors and bankruptcy trustees often pursue directors for deepening insolvency, fraudulent transfers, or preference payments. Side A coverage is essential because the company cannot indemnify in bankruptcy.
Regulatory Investigations
SEC enforcement actions, DOJ investigations, and state attorney general inquiries can result in massive defense costs even without formal charges. Many D&O policies cover investigation costs before formal proceedings begin.
Why D&O Claims Get Denied
D&O insurers deny claims for various reasons. Understanding these helps you avoid coverage gaps and fight improper denials:
1. Conduct Exclusions
Policies exclude fraud, criminal acts, and intentional misconduct. However, these exclusions typically require a final adjudication - the insurer must defend until a court actually finds wrongdoing. Don't accept a denial based solely on allegations.
2. Prior Knowledge / Prior Acts
If you knew about circumstances that could lead to a claim before the policy started, coverage may be denied. Complete your application accurately and disclose potential issues.
3. Insured vs. Insured Exclusion
Claims between company insiders are typically excluded. However, many policies have exceptions for derivative suits, employment claims, or claims by former directors. Review your policy carefully.
4. Late Notice
D&O policies are claims-made. Report any potential claim immediately - even informal inquiries or demand letters. Late notice is a common basis for denial.
5. Allocation Disputes
When claims involve both covered and uncovered matters (or covered and uncovered defendants), insurers may attempt to allocate costs, paying only a portion. California law addresses allocation disputes in favor of insureds.
California D&O Claims: Bad Faith Remedies
CAIf your D&O insurer wrongfully denies coverage in California, you may have a bad faith claim. California courts have held that the implied covenant of good faith and fair dealing applies to D&O policies just like other insurance contracts.
Potential remedies include:
- Policy benefits (defense costs and indemnity)
- Consequential damages from the denial
- Emotional distress damages (for individual insureds)
- Punitive damages for egregious conduct
- Brandt fees (attorney fees to obtain policy benefits)
Best Practices for D&O Coverage
Before a Claim
- Review policy terms annually with insurance counsel
- Ensure adequate limits for your company's risk profile
- Consider dedicated Side A coverage for personal protection
- Understand notice requirements and reporting procedures
- Maintain continuous coverage to protect against claims-made gaps
When a Claim Arises
- Report immediately - do not wait for a formal lawsuit
- Preserve all documents related to the claim
- Consult coverage counsel before accepting any insurer limitations
- Understand your rights regarding defense counsel selection
- Monitor for potential conflicts between company and individual interests