On this page
Most small business owners buy insurance to protect the company. Directors and officers insurance does something different: it protects the people running the company. If you sit on a board, serve as an officer, or lead a business with outside investors, a lawsuit aimed at your decisions personally is a risk worth understanding.
Many small businesses assume D&O is only for big public companies. The exposure is real for private companies and nonprofits too, and the policies are priced for smaller budgets.
What D&O insurance covers
D&O insurance covers claims that the directors and officers of a company made bad decisions, mismanaged the business, or breached their fiduciary duties. Covered claims can include lawsuits from shareholders, disputes with competitors, regulatory investigations, and employment-related claims that name individual leaders rather than the company.
Policies are typically built in layers called sides. Side A covers individual directors and officers when the company can’t or won’t indemnify them, which happens most often in bankruptcy. Side B reimburses the company when it does indemnify its leaders. Side C covers the company itself for securities-related claims, which matters most for companies that take on outside investment.
The coverage pays for legal defense, settlements, and judgments. It generally does not cover fraud, criminal acts, personal profits gained illegally, or claims that were already known before the policy started.
Who needs it
Any business with a board of directors or outside investors should look at D&O. Venture-backed startups are the classic example, since investor agreements often require it, but the need extends further.
Nonprofits are a big part of the D&O market. Nonprofit boards are made up of volunteers making decisions about budgets, staffing, and strategy, and they can be sued personally for those decisions. Many nonprofit D&O policies are priced modestly because the organizations themselves are small.
Family businesses with outside board members, companies preparing to raise capital, and businesses in regulated or litigious industries also belong on the list. Even a small private company with a few outside directors faces exposure if a major decision goes badly and someone with standing decides to sue.
What it costs
Industry data from Insureon puts the median cost of D&O insurance at about $133 per month for small businesses, roughly $1,600 per year. Most small business customers pay between $525 and $12,000 per year depending on their risk and the coverage they choose.
Several factors move the price:
- Revenue and financial health. Larger companies and those with shaky financials pay more.
- Industry. Financial services, tech, and healthcare face higher rates than lower-risk trades.
- Board size and structure. More outside directors means more exposure.
- Whether you have investors. Outside capital raises the chance of shareholder-style disputes.
- Coverage limits and retention. A $1 million limit with a reasonable deductible is the common starting point for small businesses.
Nonprofits with small budgets can sometimes find D&O for a few hundred dollars a year. For-profit small businesses with investors should expect low four figures as a starting point.
How it fits with your other coverage
D&O fills a gap that professional liability insurance doesn’t touch. Professional liability covers mistakes in the work you do for clients. D&O covers claims about how the company itself is run. A consultant might need both: professional liability for a client dispute, D&O for a dispute with business partners.
There’s a related line worth knowing about if you run a family business. Key person insurance covers the financial hit to the company when a critical leader dies or becomes disabled. D&O covers the legal exposure of those same leaders. They solve different problems, and many growing businesses end up carrying both.
Employment claims sometimes straddle the line between D&O and employment practices liability, so it’s worth making sure the two policies don’t leave a gap between them. Your agent should be able to tell you exactly where one stops and the other starts.
What to ask before you buy
Ask whether the policy is claims-made and what the retroactive date is. Most D&O is claims-made, meaning it covers claims filed during the policy period. The retroactive date determines how far back the covered conduct can go. A short retroactive date leaves old decisions exposed.
Ask about the definition of insured persons. Some policies cover only directors and officers, while others extend to committee members, employees in managerial roles, and the company itself. If your organization has an advisory board or non-voting members, confirm they’re included if that matters to you.
Finally, read the exclusions carefully. The insured-versus-insured exclusion, which bars claims between people covered by the same policy, can surprise family businesses where the shareholders are also the directors. Standard exclusions are fine as long as you know they’re there.
