Most small business owners think Directors & Officers (D&O) insurance is only for large corporations and public companies. While they understand the risk of employee workplace-related lawsuits and the need for Employment Practices Liability Insurance (EPLI), business owners don't see the exposures that exist to their own personal assets or company's balance sheet from D&O-related claims and believe they are immune to D&O risks.

It's up to agents to help them understand their risks and how D&O insurance responds to these risks.

What D&O Insurance Covers

D&O insurance protects owners and board members from lawsuits related to mismanaged funds; employee grievances; failure to follow organizational bylaws; failure to comply with regulations; and slander, libel and copyright infringement claims.

Both individuals and the company itself can be named in a lawsuit, which is why D&O insurance has three distinct parts:

  • Side A addresses claims against owners, directors and officers who aren't covered by the corporation's indemnification policy.
  • Side B is for the corporation's benefit. When a company does indemnify its owners, directors and officers, Side B provides reimbursement to the business.
  • Side C protects the entity itself.

Because of the high cost to mount a defense, business owners forced to defend a lawsuit can lose their assets — even their house — without D&O insurance, even if they're not found liable. Side A provides both defense coverage and indemnification in the event of a settlement or judgment. This is particularly important for businesses without a great deal of capital or D&O Side B coverage to provide legal defense and indemnification. Side A protects the business owner and directors and officers.

Policy limits for small businesses typically are $1 million, depending on the nature of the business.

Why Small Businesses Need D&O Insurance

One of the reasons small businesses don't buy D&O coverage is that they're often family-owned operations and don't expect family members to file lawsuits. Unfortunately, family disputes often result in litigation. Having the security of D&O insurance not only protects a business financially, but also provides guidance in making the appropriate decisions during what is typically an emotional time.

Business owners may also feel they won't be the subject of alleged regulatory oversights. However, this often isn't the case and, if a regulatory investigation is instigated, it's important to have defense coverage so that a potential issue doesn't become a larger problem for the business owner. The same applies with lawsuits instigated by competitors, even when the allegations are unfounded or the suit is frivolous. A business owner should be protected so that personal assets do not become compromised.

Because small businesses don't have shareholders, they often decide to forgo purchasing D&O insurance, since they don't feel they have a liability or securities-based exposure. But if there's an employment-based lawsuit alleging mismanagement, without D&O coverage the business owner won't have the support and defense coverage to step in.

A single allegation or lawsuit could break a business without D&O insurance. Additionally, if a lawsuit drags on, the defense costs alone can be significant. The majority of small business owners can't afford to be buried in litigation, let alone pay for costs involved.