Directors and Officers Liability insurance is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization. Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. It has become closely associated with broader management liability insurance, which covers liabilities of the corporation as well as the personal liabilities for the directors and officers of the corporation.
Typical sources of claims include shareholders, shareholder-derivative actions, customers, regulators, and competitors (for anti-trust or unfair trade practice allegations). Directors and officers of a corporation can be liable if they damage the corporation by breaching their duties and contracts to the corporation, mix personal and business assets, or fail to disclose conflicts of interest. In the United States, however, corporations are often required by law, particularly state law, to indemnify directors and officers in order to encourage people to take the positions. Liabilities which aren’t indemnified by the corporation are covered by D&O insurance. However, the policies have exclusions and must be read carefully.