D&O Insurance: A Necessary Safeguard for Board Members?

The insurance doesn't remove liability, but the financial consequences

Directors' and Officers' liability insurance is protection against the personal financial liability you can incur as a result of negligent acts. It's crucial to understand that it does not remove legal liability, and it never covers intentional or illegal acts. Its primary purpose is to cover the financial loss that may arise from a claim of negligence. In other words, the insurance is a safety net, not a disclaimer of responsibility.

It manages the consequences if an unfortunate event occurs.

Legal costs are often the most important coverage

A typical policy covers two main elements: the compensation amount itself and the legal costs. Often, the coverage for legal costs is the most valuable. Even if you are acquitted in a lawsuit, the costs for lawyers and legal assistance can be enormous. A good insurance policy covers reasonable and necessary costs to defend yourself against a claim, regardless of the outcome.

Without insurance, even an unjustified lawsuit can become a personal financial disaster.

"Many professional board members today decline positions if the company does not have this insurance in place."

The need is greatest where the risk is highest

The need for such insurance is particularly great in companies that are experiencing rapid growth, raising capital, or undergoing restructuring. In such phases, many critical decisions are often made under uncertainty, which increases the risk of misjudgment. In practice, it has also become a recruitment issue. Many experienced board members today will require such an insurance policy to be in place before they accept a position.

The insurance is a signal that the company takes the board's responsibility seriously.

To understand the full risk profile you face as a board member, we recommend that you read our comprehensive guide to personal board liability.