Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.

The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company. Many officers and directors will want a company to provide both indemnification and D&O insurance.

Directors and officers are sued for a variety of reasons related to their company roles, including:

Breach of fiduciary duty resulting in financial losses or bankruptcy

Misrepresentation of company assets

Misuse of company funds

Fraud

Failure to comply with workplace laws

Theft of intellectual property and poaching of competitor’s customers

Lack of corporate governance

Illegal acts or illegal profits are generally not covered under D&O insurance.

It’s a common misconception that D&O claims are mostly a public company phenomenon. In fact, a recent Towers Watson survey showed that public, private, and non-profit companies all face D&O litigation risks.

Any business with a corporate board or advisory committee should consider investing in D&O insurance, including non-profit organizations. Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.