What is D&O Insurance? Your Guide to Protecting Yourself.

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cfc 5 Directors and officers liability
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If you are the director of a business or organization then you know that there will be times when people are unhappy with you or your company. It's simply a fact of doing business! If they are really unhappy they may decide to bring a claim against you.

Your priority in this situation (apart from clearing your company's good name) will be to contain any damage to make sure that your own personal assets and finances will not be adversely affected. D&O insurance makes sure that an adverse judgment against you as a director does not affect you as an individual. It also helps to cover the cost of legal fees so that you can continue to run your business without diverting the funds needed for day-to-day expenses into fighting the claim.

What is D&O insurance?

Directors' and officers' liability insurance is a type of professional liability insurance that protects an individual from legal costs or fines that they may have incurred while performing a role in an organization. D&O insurance provides cover for people serving in these roles, making sure that professional risks do not affect personal assets and cannot lead to personal financial loss.

D&O insurance can cover individuals if damages are awarded against them if they are ordered to make settlements. D&O insurance can also pay legal defence costs. Let's look at some of the accusations which would mean that an individual would need this specific type of policy.

What does D&O insurance cover?

  • mismanagement
  • financial malpractice
  • miscommunication to creditors and shareholders
  • breaking federal and provincial laws
  • workplace safety breaches
  • illegal employment practices
  • illegal environmental practices

What is not covered by D&O insurance?

  • deliberate fraud
  • embezzlement
  • damage to property
  • physical harm

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Who needs D&O insurance?

Anyone who is the director of a private company or an NGO should consider buying D&O insurance. Officers of harbour authorities can also purchase D&O insurance.

Claims can be brought against the director of an organization. It is a wise investment for a director to have D&O insurance so that they are protected if a claim is brought against them. D&O insurance can work like a firewall to make sure that a director's finances and assets are not vulnerable to claims brought against them in their professional role.

Good to know

Partnerships and sole traders that do not have executive-level roles do not need D&O insurance.

Do small businesses need D&O insurance?

Yes, small business directors are as vulnerable to having claims brought against them as the directors of large organizations. Small business directors may also have fewer assets and therefore have an even greater need to keep their professional liabilities separate from their finances. Let's take an example:

Timothy is the director of a small marketing firm in Ontario. He has a claim brought against him by an ex-employee against him of wrongful employment practices relating to the hiring and firing of his workforce. As his business is small, Timothy does not have in-house legal counsel and is now faced with having to hire external lawyers and also having to pay costs if the law finds against him. With D&O insurance he would have his legal costs and any subsequent liabilities covered.

How much does D&O insurance cost?

The cost of D&O insurance will vary based on the following factors:

  • the size of the business or organization
  • size of the workforce
  • history of past claims
  • revenue

To find the best deal use our online comparison tool and remember to always closely read the small print and the exclusions:

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Who sells D&O insurance?

D&O insurance is sold by many leading business insurance providers in Canada, including:

  • AIG
  • Aon
  • BFL Canada
  • Chubb
  • Liberty Mutual
  • Victor Insurance

How is D&O insurance structured?

D&O insurance has three separate clauses: A, B and C. Non-profits are likely to only need AB coverage.

  • Side A Coverage pre-funds directors for costs that will not be reimbursed by the business or organization.
  • Side B Coverage reimburses the company or organization for costs they have paid to their director(s)
  • Side C Coverage, or “entity coverage”, covers the business or organization for losses if it is sued along with its directors. The extent that Side C provides coverage is dependent on whether a business or organization is private or public.

How does D&O insurance work?

D&O insurance covers both current directors and former directors of an organization or business. The members of the board of directors of non-profits are not exempt from liability or from having claims brought against them and therefore should also purchase D&O insurance.

D&O insurance is a type of professional liability insurance which covers directors and officers in case of alleged mismanagement or acts of negligence. Since the world of business is often a litigious one directors and officers must make sure to limit their liability.

Is D&O insurance worth it?

If you are the director of a company or organization then D&O insurance is something you should consider essential. We all make mistakes, whether you misunderstand a new application of employment law or just take your eye off the ball regarding environmental regulations and you don't want to let the future of your business be vulnerable to this kind of error.

Similarly, you will want to keep your personal and business finances separate. A successful claim against your business should not affect your own credit rating or, in a worst-case scenario, push you toward bankruptcy. D&O is an essential form of business liability insurance that it would be irresponsible to operate without.

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