How to Limit a Corporation's Liability With Directors and Officers Insurance

Directors and officers (D&O) liability insurance can protect the top tier of a company's management if they are sued for their overall performance or particular business decisions. This type of insurance covers harassment or discrimination lawsuits, and is usually required by a company's board of directors. Follow these steps to obtain it.

Things You'll Need

• Phone
• Computer with Internet access

Instructions

1. Consider your insurance needs. Over 50 percent of D&O lawsuits involve employment practices that are considered unfair or discriminatory. This insurance can also cover the mismanagement of company assets.

2. Prepare a list of possible agents. Start with the provider directory offered by the National Association of Professional Insurance Agents (see Resources below).

3. Narrow your choice of agents by asking for references. Ask the references whether the agent has made helpful recommendations, saved the company money and been readily available when needed for questions or explanations. Choose an agent based on the feedback and your personal interactions with the candidates.

4. Decide whether you want claims-made insurance or occurrence insurance. Claims-made insurance covers you if you are insured on the date the lawsuit is filed, while occurrence insurance covers you only if the policy was in place when the wrongdoing occurred.

5. Consider extended coverage to further limit your corporation's liability. For example, you may want to look into protection for both affiliated and unaffiliated directors and officers, and both office and non-office employees. Unaffiliated officers can be protected when they work on a temporary or consultant basis at the request of the company.

6. Finalize your insurance application. Submit the application given to you by your agent, as well as any supplementary materials required, including your income statements from the most recent tax year. From the date of submission, the insurance should take effect within 1 week.

Tips & Warnings

• Make sure you understand the difference between directors and officers liability insurance and errors and omissions insurance. Directors and officers liability insurance covers the individual performance of the management team, while errors and omissions insurance covers the company's products or services in general.

• It is recommended that you get both errors and omissions insurance and directors and officers liability insurance to fully protect your corporation.

• Your insurance provider may request that you have an emergency plan. This plan will need to focus on details such as how many employees will work in case of a disaster and where you will set up a temporary location if your primary work location needs to undergo extensive repairs.

• Without directors and officers insurance, your corporation is vulnerable to costly lawsuits. Disgruntled employees and stockholders who file a suit usually name the company and one or more members of the management in the suit.

• Expect to purchase this type of insurance before seeking investments from venture capitalists, who usually will require directors and officers insurance before making an investment.