Bad Judgment?

Savvy entrepreneurs hire smart executives to run their companies--but what happens if one of those directors or officers makes a mistake and you get sued? With directors and officers (D&O) liability insurance, you--and they--are protected.

According to Anita Setnor Byer, president of Setnor Byer Insurance & Risk in Fort Lauder-dale, Florida, D&O "covers directors and officers against wrongful acts typically described as bad business judgment." Such acts are not covered under your general liability insurance. "The exposure of directors and officers is separate and distinct, because they are stewards of the enterprise," Byer says.

D&O would kick in if, for example, one of your directors or officers unwittingly used intellectual property belonging to another company or individual, if they committed a breach of confidentiality that caused economic damage, or if they just made a bad business decision.

How can you tell if your company needs D&O coverage? You should do your own risk assessment, but Byer says you are probably a candidate if your company is very visible or active on the Internet (which increases your likelihood of being a litigation target), if you're in an aggressive growth mode, or if your directors and officers are being relied upon as a fiduciary (meaning they are in a position with a high expectation of good decisions and trust).

D&O policies are complex; when you shop for this type of insurance coverage, be sure to do it with an agent who regularly writes the coverage and understands it well.

Jacquelyn Lynn is a business writer in Orlando, Florida.

This article was originally published in the September 2003 print edition of Entrepreneur with the headline: Bad Judgment?.