{"id":5116,"date":"2016-04-04T11:47:57","date_gmt":"2016-04-04T16:47:57","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/liability-and-insurance\/why-purchase-directors-and-officers-insurance.html"},"modified":"2024-05-23T03:19:59","modified_gmt":"2024-05-23T08:19:59","slug":"why-purchase-directors-and-officers-insurance","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/liability-and-insurance\/why-purchase-directors-and-officers-insurance.html","title":{"rendered":"Does Your Business Need Directors and Officers Insurance?"},"content":{"rendered":"\n
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Does Your Business Need Directors and Officers Insurance?<\/h1>\n
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\n By Susan Buckner, J.D.<\/a> | Legally reviewed by Susan Mills Richmond, Esq.<\/a>\n | Last updated\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Small businesses and private companies need many kinds of business insurance<\/a>. The standard business owner’s policy (BOP) provides general liability coverage, which may be enough for most small companies.<\/p>\r\n

As your company grows, your officers and directors may face liability for decisions they make on behalf of the company. Customers, vendors, employees, and even other partners and directors can bring legal action against the directors. When you incorporate your small business, you need a particular type of insurance coverage, known as directors and officers liability insurance<\/b>.<\/p>\r\n

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What Are Directors and Officers?<\/h2>\r\n

Your directors and officers<\/a> are the ones who make decisions and manage your corporation. In a small company, they may be the small business owners themselves. Under the rules of incorporation<\/a>, you must have company officers and a board of directors with board members to be a "corporation."<\/p>\r\n

Corporate officers make financial decisions for the company. They are fiduciaries<\/a> to the company and one another. As fiduciaries, they have duties to the company and its board of directors. A fiduciary duty means acting in the best interest of another party, in this case, the company. Directors and officers have a duty of care<\/a> to act as reasonably prudent people when making decisions.<\/p>\r\n

When officers fail to act in the company’s best interest or do wrongful acts, the company is liable. Ordinary small business insurance may not cover the financial loss. The business shields a corporate officer from liability. For this reason, corporations need directors and officers coverage or D&O insurance.<\/p>\r\n

Reasons for D&O Insurance<\/h2>\r\n

Most corporations indemnify<\/a> their directors and officers against liability for their actions. This means the company gives the officer legal protection against acts performed on behalf of the company. Indemnification isn’t always sufficient protection for the corporation. If the company must sue the officer, indemnification will not apply.<\/p>\r\n

D&O insurance policies provide coverage for:<\/p>\r\n