Directors’ and Officers’ (D&O) Liability Insurance

What is D&O Insurance?

During these increasingly litigious and volatile times, your company’s officers and board of directors may be targets of financially damaging lawsuits. Decisions and judgments made by directors and officers are constantly scrutinized and from a broader range of parties than just shareholders, such as state and federal regulators and other governmental authorities. Directors’ and officers’ (D&O) insurance offers executives personal liability and financial loss protection from wrongful acts committed – or allegedly committed – as corporate officers. D&O insurance also offers balance sheet protection to the corporation.

Why is D&O Insurance Important? 

D&O insurance plays an important role for companies looking to attract and retain a top management team in an environment where heightened risk and increased oversight are part of corporate life. Purchasing D&O insurance will not prevent claims from happening; however, D&O insurance should be viewed as one of the necessary components of corporate governance.

Additionally, D&O insurance is especially important for public and private companies preparing for a transformational event like an initial public offering (IPO). Publicly traded companies are often viewed as riskier than private companies due to the potential exposure to possible shareholder class action claims. Public companies have heightened financial and public disclosure reporting requirements, increasing exposure to shareholder claims.

What Does D&O Insurance Cover?

D&O insurance policies generally cover exposures relating to any actual or alleged error, misstatement, misleading statement, neglect, breach of duty, omission or act by the insured employee in their capacity as such. In other words, it can cover the cost of claims made against a company and its corporate decision-makers, including directors, officers, managers and board members, when sued (most traditionally by its shareholders) for failing to perform their duties.

What are the D&O Coverage Considerations Post-IPO?

Too often, in the rush of IPO preparation, insurance placements – including D&O liability insurance – take a backseat. However, liability risks are heightened in the first three years after an IPO. There can, for example, be a mistake or misrepresentation in the prospectus, instances of corporate mismanagement, or misinformation conveyed during the roadshows. In a worst-case scenario, the resulting claims can jeopardize the continuity of your enterprise.

The marketplace for D&O insurance for companies 12 to 36 months post-IPO is increasingly competitive. As companies clear this period of increased risk, D&O insurers are more eager to offer coverage, often at a significant discount to existing premiums. These increasingly attractive terms reflect the following:

• The statistical likelihood that a lawsuit is filed in the first 24 months post listing
• High premiums and retentions paid at IPO

How Aon Can Help