According to the U.S. Small Business Administration, more than half of the American workforce owns or works for a small business. Twenty-five percent of small businesses with employees work from home. When considering sole proprietor operations with no employees, this percentage increases to approximately 50%.
If you run your business from home, you may think that directors and officers (D&O) insurance is not necessary. However, the size and location of your business do not determine the need for protection or the amount of coverage you need. If you have employees or work with suppliers, other companies, or investors who could sue your leadership for noncompliance, you should discuss D&O coverage with your A and H Insurance professional.
This coverage can be crucial because your company and its individual leaders may be named in a lawsuit against the company. If those people do not have D&O liability insurance, they will have to fund their own legal defense. And if the organization does not have a D&O policy, the owners will have to use crucial company funds to defend the company.
Please note that if you operate your business as a designated legal entity, such as an LLC, that does not mean your personal assets are automatically protected. And even if you established your business as a sole proprietorship, you could still be sued by a customer or client.
What does D&O insurance cover?
Although the scope, industry and structure of your business may affect your policy options and premiums, a well-designed D&O policy will cover any legal expenses, damages, or settlements against you if someone questions your professional judgment. Protects your organization’s leaders (and their spouses) from personal financial loss if they are accused of failed or improper actions taken on behalf of the company, including breaches of duty, negligence, and misrepresentations. These include leadership responsibilities related to:
- Management of corporate operations
- Strategic planning
- Ethical hiring of competitors’ talent
- Oversight of data and other security concerns
- Regulatory compliance
- Use of company funds
- Appropriate and truthful reporting and payments (e.g., taxes and invoicing)
D&O insurance does not cover fraud, criminal activity, or losses related to illegal profits. It also excludes losses related to bodily injury, property damage, and employee retirement funds.
How D&O is different from other insurance
You may think of D&O insurance as duplicating the protection you already have under other policies. However, leadership risks are often excluded from other major insurance policies. While your insurance professional can explain the differences between your policies, the general differences and gaps in leadership protection are outlined below.
General Liability
Although you should have a commercial or business general liability policy, you cannot count on it to cover allegations against your company’s management. While general liability insurance will kick in if one of your decisions causes bodily injury to another person or physical damage to their property, it typically excludes liability claims alleging unlawful acts or decisions related to business operations. Examples include mismanagement of funds, questionable business practices, conflicts of interest, and violations of contracts or agreements.
Professional liability
Even a professional liability policy (also known as errors and omissions (E&O)) is no substitute for D&O coverage. D&O protects you from different risks.
Professional liability protects business assets if your company or its employees are accused of failing to perform up to the expected standard of care. For example, an IT consulting company could make a programming error that shuts down a client’s network, or a marketing company could miss a crucial advertising deadline that leads to lost sales. Any claim or lawsuit related to these types of performance failures would be covered by a professional liability policy.
On the other hand, if a company is accused of stealing customers from a competitor in violation of a non-compete agreement or failing to disclose its finances as part of an asset sale, its D&O policy would be activated. This is because these issues are more closely linked to leadership decisions.
Homeowners’ insurance
You can run your business from a home office, but your home insurance doesn’t cover business-related risks. Homeowners insurance typically excludes liability claims against any business owned or operated by you or another member of your household.
Get the right policy
D&O liability insurance can be obtained as a stand-alone policy. However, your A and H Insurance professional may recommend D&O insurance as part of a comprehensive business insurance plan that can include some or all the following:
- Professional liability (described above)
- Workers’ compensation — for employees injured on the job
- Business property — to cover physical equipment and office space
- Commercial auto — even if you use a personal vehicle for business
- Cyber insurance — protect against losses from a hack or cyber crime
- Employment practices liability — to protect against allegations of wrongful termination, discrimination, workplace harassment and retaliation
- Employee health & life benefit plans — provide insurance incentives for your employees
- Fiduciary liability — which covers claims of employee benefit plan mismanagement
Ultimately, your recommended D&O coverage depends on your operations and who has a financial interest in your organization. Partnerships, nonprofit organizations, private equity investments and other financial arrangements impact your D&O needs. After a thorough review of your risks, A and H Insurance will work with you to find the right D&O policy for your company, whether you own a small home business or are part of a huge corporation.
