If you serve on an organization’s executive team or board, you make decisions every day that impact the company’s fate. Though you might not realize it, your actions could jeopardize the business’s assets as well as your own.
Vendors, customers, shareholders, and regulators can make a claim that a director or officer engaged in wrongdoing in managing the company—exposing these individuals and the business to legal action.
It's critical to understand why businesses and their directors and officers are at risk and how the right directors and officers (D&O) coverage provides the liability protection you need.
Why D&O Claims Are on the Rise
Two key trends are fueling an increase in D&O allegations and lawsuits.
- D&O claims follow economic and market trends. As deregulation and other anticipated changes under the current administration take hold, economic activity is expected to increase—bringing more D&O allegations. When IPO activity rises, there’s greater risk of a claim that the company violated US Securities and Exchange (SEC) rules, including disclosure requirements.
- Class actions against boards are growing more common. Plaintiff’s attorneys are more inclined than ever to file class actions against corporate boards for decisions and actions that negatively impact shareholders. This trend is exacerbated by a rise in litigation funding: when a third party provides financial funding for lawsuits, encouraging attorneys to actively recruit a large class of plaintiffs.
The growing use of AI could also increase your business’s D&O exposure. For example, if new AI-powered tools render your product or service obsolete, both your company and your directors and officers could face allegations that you failed to adapt the business’s strategy to head off the competitive risk.
How Your Actions as a Director or Officer Could Come Under Fire
Without the protection of a robust D&O insurance policy, your company, directors, and officers could face allegations such as these (which represent a partial list of risks):
- A breach of your fiduciary duties (for example, failing to take proper steps in response to the company’s financial difficulties)
- Misrepresentation (such as intentionally over-reporting your assets to secure a customer contract or “greenwashing” your financials to overstate your steps to reduce your carbon footprint)
- Making financial or operational reporting errors
- Failing to make accurate disclosures, such as those required by regulators
- Mismanagement of the company that leads to a drop in the business’s stock price
- Mismanagement that leads to a financial loss unrelated to securities (for example, failing to properly protect the business from a cyberattack)
Keep in mind that D&O policies typically exclude intentional acts of fraud, bodily injury, property damage, and pending litigation or acts committed before the coverage went into effect.
The Target D&O Case: A Cautionary Tale
Target was hit with a D&O claim in response to a Pride Month campaign that launched in May 2023. Customer backlash against the Pride-themed merchandise led to a $10 billion loss in market capitalization, negatively affecting stockholders. In response, a legal activist group filed a lawsuit alleging that Target, its CEO, and executives misled investors by failing to disclose the campaign’s risks.
Target noted that its 2021 and 2022 annual reports had broadly disclosed that negative reputational incidents—related to environmental, social, and governance (ESG) or diversity, equity, and inclusion (DEI) initiatives—"could adversely affect our business operations, including through lost sales, loss of new store and development opportunities, or team member or retention difficulties.” However, the trial court disagreed with Target’s argument that the disclosure was adequate and concluded that the allegations were sufficient to support a misrepresentation claim.
How D&O Coverage Protects Businesses and Individuals
With cases like these on the rise, it’s critical to understand the difference between personal and business D&O insurance and to secure the proper coverage. In fact, individuals who are thinking about taking a C-suite role in your company or joining your board are likely to ask if you have sufficient D&O coverage.
Purchasing D&O insurance can be complicated, since these policies typically have multiple components that each work differently. The following are the most important considerations when purchasing D&O coverage to protect the business and its officers and directors.
Side A Coverage
Side A D&O protection applies to two situations:
- The organization does not indemnify its directors and officers (for example, the business’s employment agreements expressly exclude indemnification)
- The organization cannot indemnify its directors and officers (for example, the business files for bankruptcy or becomes insolvent)
In these instances, Side A coverage protects the individual directors or officers from a D&O claim. It typically covers legal defense costs as well as any settlement amount or judgment resulting from a lawsuit.
Side B Coverage
In instances where the organization can and does indemnify its directors and officers from a D&O claim, Side B coverage reimburses the company for those financial losses.
Side C Coverage
Also known as entity coverage, Side C protects the company against D&O claims. Additionally, if the company issues securities (either as a public entity or as an LLC with shareholders), Side C coverage applies if the shareholders file a D&O lawsuit, as in the Target case.
Unique D&O Considerations for Nonprofits
The nature of a nonprofit or non-governmental organization (NGO) operation creates different D&O exposures than most for-profit businesses face. For instance, nonprofits and NGOs must meet strict spending and financial transparency requirements for funds obtained through grants or donors. If an audit uncovers evidence that the organization failed to meet those requirements, the grantmaker or donor could file a D&O lawsuit.
If the nonprofit doesn’t pay its board members (which is often the case), those volunteers might not have the same level of experience as a compensated board member. Though they might have great passion for the nonprofit’s mission, if they have limited expertise serving in this capacity they could be more prone to errors that trigger a D&O claim.
When Additional Personal D&O Protection Makes Sense
If you serve on the board of a nonprofit organization, you might be wondering, “Do I need personal D&O insurance as a director?” The answer is yes: You should consider purchasing a personal D&O policy for further protection, especially if you have substantial assets. You can typically buy this coverage as an endorsement to your personal umbrella liability policy (a must-have coverage for high-net-worth individuals and families).
One of the main advantages of personal D&O coverage is that it provides additional limits beyond the nonprofit’s commercial policy. While many nonprofits only carry $1 million in D&O coverage, individuals can often obtain a personal D&O policy with a limit of a few million dollars. If you have significant personal assets, it’s essential to secure the additional limits of a personal D&O policy.
Personal D&O coverage is only available for members of nonprofit boards, not for-profit organizations. Some insurance companies limit the number of boards you can serve on, and some only write policies for unpaid directors.
Before You Take a Position as an Officer or Director…
Be sure to ask about the organization’s D&O coverage. Find out which insurance company writes the policy, what the limits are, and whether the policy includes sides A, B, and C coverage. You can even ask for a certificate of insurance.
Turn to B. F. Saul Insurance for D&O Protection
Our team has deep experience helping nonprofit and for-profit organizations reduce their liability risk with the proper coverage, including D&O insurance. We have the expertise to protect your personal assets from liability risk as well. And as an independent insurance advisor, we work with a variety of insurance carriers that provide the robust D&O coverage you need to protect both business and personal assets.
Schedule a call with a B. F. Saul specialist to learn how we can help protect your business or personal assets with the right D&O coverage.
Brandon Newlands brings over 20 years of litigation experience to his role as SVP and Senior Director of Coverage and Claims at B. F. Saul Insurance. Brandon supports clients in the event of a claim or coverage issue, and specializes in coverage disputes, claims evaluation/valuation, and risk analysis. He leverages his expertise to guide clients in making informed decisions that align with their unique circumstances.