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Serving the Pacific Northwest for over 70 years 

(503) 227-1771

What is D&O Insurance?

After a series of company failures, (think Enron) stockholders have begun to hold Directors and Officers of companies accountable for their failure to exercise management reviews and oversight. Increasingly, stockholders have seen litigation as the way to recap losses and punish management for their failure to fulfill their obligations.

Enter the world of Directors and Officers Liability Insurance, often referred to as D&O coverage. D&O has become an essential part of any public, private or non-profit organization’s risk management profile. In the post-Enron era, Directors and Officers are being held to a higher standard of care with legal responsibilities to shareholders, investors, employees and others. The roll of directors has evolved and the public is holding them increasingly responsible for the day to day operations of the companies they oversee.

Directors and Officers are charged with implementing sound corporate policies and monitoring management’s implementation of those policies. Directors and Officers are required to exercise reasonable care and due diligence to place the interests of the corporation and shareholders foremost in decision-making and not to exceed the authority conferred by the organization.

The first D&O policies were issued in the early 1930’s by Lloyd’s underwriters after the Great Depression. There was little demand and limited availability for D&O coverage until the 1960’s. A typical policy covers “wrongful acts” by directors and officers of an organization, acting within their capacity to make decisions regarding the entity’s day to day activities. A “wrongful act” is often defined to be an error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed or attempted by an insured person in an insured capacity.

Policies are available for public and private for-profit companies as well as non-profit entities. The good news for non-profits is that D&O insurance is broader as well as less expensive than similar coverage of for-profit organizations. Numerous insurers are willing to write non-profit D&O insurance with minimum premiums of less than $1,000 per year.

Who can sue?

Directors and officers can be sued by the entity itself or by other current or former directors and officers, employees, shareholders, investors, lenders, vendors, customers, competitors, various government officials such as state attorney generals, IRS, and various other third parties.

Here is an example of the source of most D&O claims:

Source: Towers Perrin Tillinghast D&O Liability Survey






























Other 3rd Parties





There are generally two types of actions for D&O lawsuits: Derivative suits by shareholders or members suing for poor performance, incompetent management, mistakes, bad judgment, etc. and Non-Derivative suits from other parties, particularly employees.

Coverage Limits

There are several schools of thought with regard to limits analysis. In order to determine the proper level of coverage for your business, speak with a qualified local independent insurance agent. With that being said, we rarely write a risk with less than $1M coverage limit. Many insurance carriers will look to the asset size of a company to determine the level of limits they are willing to provide. Often times an insurer will not provide D&O limits in excess of the total asset size of a company. The thought being that the insurer does not want the D&O policy to be the company’s largest asset.

D & O Landscape

The D&O market has been a virtual moving target over the past decade. The accounting scandals of Enron, WorldCom, etc. produced a “hard market” in late 2001. Insurers began to take a hard look at capacity, deductibles and pricing and underwriters began to scrutinize financials, accounting practices and corporate governance thanks to the passing of Sarbanes Oxley Act of 2002.

Since 2002 the D&O market has become much more competitive – this is due primarily to improved transparency with regard to accounting as well as a general increase in the number of insurers willing to offer the coverage. We do continue to see an increase in the number of bankruptcy claims over the past several years due to the economic crisis.

Because D&O is primarily a financially driven product; companies that continue to struggle financially will face a tougher D&O market. Beyond the financially-challenged, other industries facing a tough D&O market include financial institutions, technology/telecom (industries with high consolidation) construction and real estate.

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