D&O Insurance vs. Cyber Insurance — What's the Difference?
Directors and officers (D&O) insurance is designed to protect the personal assets of corporate directors and officers from lawsuits and claims arising from their decisions and actions in managing the company. These policies cover legal costs, settlements, and judgments in cases related to alleged wrongful acts, such as breach of duty, mismanagement, or failure to comply with regulations.
Key Risks That D&O Insurance Policies Cover
- Mergers and acquisitions: Claims that arise from mergers, acquisitions, or divestitures, such as allegations of misleading financial statements or failure to disclose important information during the process.
- Wrongful acts: Coverage for claims based on wrongful acts, such as errors, omissions, misstatements, neglect, or breach of duty committed by directors and officers.
- Settlements, judgments, and defense costs: Payment for settlements or judgments if the directors or officers are found liable for damages, such as breach of fiduciary duty, mismanagement, or failure to comply with regulations. Defense costs are also paid, even if there is no judgement or settlement.
- Securities litigation: Shareholders may file lawsuits if they believe the company’s leadership misrepresented financial performance or failed to disclose material information.
- Regulatory investigations: Directors and officers can face scrutiny from regulatory bodies, such as the SEC or FTC, resulting in legal battles or penalties.
- Employment practice claims: Wrongful termination, harassment, or discrimination claims made by employees often target directors’ and officers’ decision-making processes.
- Breach of fiduciary duty: Leaders are responsible for acting in the best interests of shareholders and other stakeholders. Failing to do so may result in claims of breach of fiduciary duty.
D&O insurance is typically focused on protecting individuals at the top of an organization from personal financial loss due to legal actions.
Cyber insurance is aimed at addressing the risks associated with cyberattacks and data breaches. As cyber threats become more sophisticated, the financial consequences of a cyber incident can be severe, including data loss, business interruption, and reputational damage. Cyber insurance generally covers:
- Incident response costs: Includes IT forensic analysis, legal fees, and public relations efforts to manage the fallout from a data breach.
- Notification and credit monitoring: Costs of notifying affected individuals and providing credit monitoring services after a breach.
- Regulatory fines and penalties: Some cyber policies cover fines imposed by regulatory bodies for failing to protect sensitive data.
- Business interruption: Lost income due to system downtime caused by a cyberattack or ransomware.
- Cyber extortion: Payment demands related to ransomware attacks.
- Third-party liability: Payments to individuals or class action lawsuits.
While D&O insurance addresses the risks tied to leadership decisions, cyber insurance focuses on the risks related to the organization’s data and digital infrastructure.
Why It’s Important to Identify Gaps in Insurance Coverage
Given the distinct nature of D&O and cyber insurance, organizations must be diligent in identifying gaps that could leave them exposed. Many executives may mistakenly assume a D&O policy will cover liabilities stemming from a cyber incident, especially if the fallout of the breach results in lawsuits targeting company leadership. However, this is often not the case.
D&O insurance may cover claims against directors if they are accused of failing to implement proper cyber risk management protocols, but it is unlikely to cover the costs associated with the actual data breach or business interruption. Likewise, while cyber insurance will provide coverage for data-related incidents, it won’t protect directors from lawsuits that arise from poor decision-making, negligence, or failure to disclose cybersecurity risks to shareholders.
For example:
- Failure to disclose a cybersecurity vulnerability: If shareholders claim the company's leadership failed to disclose a known cybersecurity risk that later caused financial damage, this could result in a D&O claim. However, the actual costs of managing the data breach would be covered under cyber insurance.
- Inadequate cyber risk management: Directors may face lawsuits if they are accused of failing to oversee the implementation of adequate cybersecurity measures. In such cases, cyber insurance won’t shield the directors, but a D&O policy might.
This makes it critical to ensure both policies are reviewed side by side, so there are no assumptions about what is or isn’t covered. More importantly, this helps businesses avoid situations where they have no coverage at all for specific types of risk.
D&O and cyber insurance provide critical protection for different risks, and they should be carefully coordinated to avoid any gaps. Regularly reviewing and updating these policies ensures companies are protected from evolving threats and leadership is shielded from personal financial exposure in the face of lawsuits, regulatory actions, or unforeseen cyber incidents.
Your Leavitt Select insurance advisor is here to help identify gaps and make sure your business is protected from the unexpected. Schedule an appointment today to review your insurance coverage.
