Directors and officers are responsible for making the tough choices that can make—or break—a company’s fortunes. In doing so, they must consider the best interests of employees, customers, and shareholders while also keeping in mind corporate best practices.

Limited or imperfect information and tight deadlines add to the overall complexity of the decision-making process and can lead to poor outcomes or even outright mistakes.

To hire and retain talented directors and officers, companies need to give them the freedom to make corporate decisions without the fear of being personally liable for losses stemming from those decisions.

That is where Directors & Officers (D&O) insurance comes into play, and it is a critical piece of your management liability policy. It is designed to protect individuals acting in their capacity as a director or officer of an organization against the consequences of any alleged or actual “wrongful acts” they commit while performing regular supervisory duties.

These wrongful acts can include any of the following:

• Regulatory violations, such as violations of workplace laws
• Misrepresentation of company assets
• Legal risks from day-to-day operations
• Misuse of company funds
• Litigation over mergers and acquisitions
• Conversions to employee stock ownership plans
• Accusations of mismanagement by stockholders

Included in your D&O insurance would have been coverage for the lack of preparation many businesses experienced during the pandemic. Claims have been filed for management decisions related to lost revenue, increased expenses, employee and customer safety, damage to company image, decisions to close or not to close, and layoffs and furloughs.

Without D&O insurance coverage, executives’ personal assets are at risk in the event of a lawsuit.

The pandemic, in many ways, created D&O exposures that were not there before. D&O claims resulting from COVID-19 have changed our perception of what can and cannot result in a lawsuit.

For example, during the pandemic, Amazon employees staged a walkout after they determined that their working environment was unsafe. Any lawsuit related to this would be a claim against the company’s D&O insurance policy because decisions regarding working conditions are effectively the responsibility of corporate directors and officers. In fact, there are lawyers lined up to file claims like these all over the country.

Many states are considering instituting COVID immunities for businesses to address the influx of claims, but of course, this takes time. In the meantime, a D&O insurance policy saves you the stress of putting resources out to cover these claims.

Even if you are not liable for any damages, you will still be on the hook for defense costs, which is something we see many businesses forget to consider. Businesses with a complete management liability policy have these costs covered by their D&O insurance.

Prior to COVID, the market had plateaued, and we were starting to see reductions in premiums for many of our clients. However, D&O insurance rates are now on the rise because of the increasing number of claims.

COVID-related claims are something the insurance market has not seen before, so we are experiencing some pushback from insurance carriers as they work to recalculate premiums, coverage, and deductibles based on this new information.

While premiums and deductibles are going up, some insurance carriers are withdrawing portions of D&O coverage. D&O insurance typically contains three parts: coverage for the faults of individual directors and officers, agreements to reimburse a board member for costs related to a lawsuit, and coverage for the entity itself. In response to COVID-related claims, some carriers are refusing to offer full coverage in all three areas.

From our perspective as advisors, any business with a corporate board or advisory council should consider investing in D&O insurance as soon as possible if they have not already.

This includes not-for-profits and small businesses, which fall victim to these lawsuits more often than you think. If you have any questions related to changes in D&O insurance coverage or your management liability policy, connect with us and we will be happy to get you the answers and coverage you need.