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What is Directors and Officers Liability Insurance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 December 2016
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    Conjecture Corporation
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Sometimes referred to simply as D&O, directors and officers liability insurance is a type of insurance protection that helps to cover officers and directors in the event that the organization or company they are associated with should be sued in a court of law. The scope of coverage often includes helping to offset the costs of legal representation when the directors and officers are the defendants of a wrongful acts lawsuit, and may also help provide funds for the settlement of this type of suit. Today, directors and officers liability insurance is often carried by corporations along with liability coverage that helps to protect the business itself in the event of some type of lawsuit that claims negligence or other wrongdoing on the part of the corporation.

There are varying classes or types of directors and officers liability insurance available today. One type provides coverage for boards of directors and other officers who are not specifically covered in the terms and conditions of the corporate liability coverage currently held by the business. Another class provides the coverage when the company chooses to indemnify its directors and officers. A third variation on directors and officers liability insurance not only protects the officers and members of the board but also provides protection to the business entity itself.

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The benefit of directors and officers liability insurance is that in the event a lawsuit is brought against an individual who is an officer or director of a company, the plan will help to defray legal costs and also possibly aid in arranging a settlement. For example, if shareholders of a given corporation believe that a specific action of a company officer directly triggered losses in dividends, they may choose to sue the individual for the losses rather than the company. In this scenario, the insurance would aid in providing legal counsel and deferring the costs, and also provide some measure of assistance in attempting to settle the suit before it actually went to court.

The need for directors and officers liability insurance will vary, based on the type of protections that different jurisdictions already provide to officers and directors of companies operating within their boundaries. In some cases, the D&O offered in the area may be somewhat narrow in focus, since there are already laws that protect the interests of company officers and directors in certain situations. When those laws are extremely broad or are non-existent, the scope of coverage provided by directors and officers liability insurance may be much more comprehensive in both the types of situations covered by the insurance plan and the level of support that is provided to the insured party.

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