Directors & Officers (D&O) insurance addresses claims involving how your company is led and governed. Where E&O is about professional service delivery failures, D&O is about leadership decisions — the choices made by the people running the business. This guide explains the key terms you'll find in a D&O policy in plain English, so you can have more informed conversations with your broker and better understand what you're reading.

Use this alongside the E&O guide as a quick reference whenever you're reviewing your program, comparing options, or trying to make sense of the language in front of you.

HOW YOUR POLICY WORKS

Claims-Made Policy Like E&O, D&O is a claims-made policy — it responds to claims that are both made against you and reported to your insurer during the active policy period. The timing of when a decision was made, when harm allegedly occurred, and when the claim is filed all matter. Continuous, uninterrupted coverage is important for the same reasons it is on the E&O side.

Retroactive Date Some D&O policies set a retroactive date that limits coverage to wrongful acts occurring after a specific point in time. However, many D&O policies — particularly those designed for private companies — are written with full prior acts coverage, meaning there is no retroactive date. The policy responds to wrongful acts regardless of when they occurred, as long as the claim is made during the policy period and the circumstances weren't known or disclosed at inception.

Continuity Date Focuses on what you already knew. If leadership was aware of a potential problem — a brewing investor dispute, a franchisee threatening litigation, a regulatory inquiry — before this date, that situation may be treated differently than something that arose without prior warning. What was disclosed on the application, and when, matters.

Extended Reporting Period (ERP) Gives you additional time — typically 1 to 3 years — to report claims after the policy ends, for wrongful acts that occurred while the policy was active. Especially relevant after a company sale, merger, or significant leadership change, when prior decisions may surface as claims later.

Run-Off Coverage A special form of extended coverage that activates in the event of a takeover, merger, or acquisition. Rather than a standard ERP, run-off coverage extends protection for acts committed before the triggering event for a defined period — typically 1 to 6 years — at a predetermined additional premium. It's designed to protect outgoing leadership whose decisions may be scrutinized after a transaction closes.

Reporting Period The window you have to notify the insurer after a claim is made. Like E&O, there is typically a hard deadline — often 90 days after the policy period ends — and missing it can affect coverage for an otherwise valid claim.

KEY COVERAGE TERMS

Insuring Clauses — Side A, Side B, and Side C D&O policies are structured around three insuring clauses that define who is being protected and in what circumstances.

Side A covers individual directors and officers directly — when the company is unable or unwilling to indemnify them. This is the most personal protection in the policy and often carries a $0 retention.

Side B reimburses the company after it has already paid to defend or indemnify a director or officer on a covered claim.

Side C covers the company itself as an entity — most commonly relevant for publicly traded companies facing securities claims, though it appears in private company policies as well.

Wrongful Act The core trigger of a D&O policy. In the D&O context, a wrongful act means any actual or alleged error, omission, misleading statement, misstatement, neglect, or breach of duty committed by a director, officer, or the company while acting in their leadership capacity. This is distinct from an E&O wrongful act, which is tied to professional service delivery — a D&O wrongful act is about governance, oversight, and management decisions.

Mismanagement A type of wrongful act where someone claims leadership failed to properly oversee or run the organization — for example, poor financial decisions, failure to enforce brand standards at the system level, or inadequate oversight of operations. This is a broad allegation that often appears alongside other claims.

Misrepresentation A claim alleging that a director or officer made a false or misleading statement — not necessarily intentionally — and someone relied on it. In franchising this can involve statements made to investors, lenders, or franchisees about the health or trajectory of the system.

Non-Disclosure A claim alleging that leadership failed to share material information that others needed to make decisions. Like misrepresentation, this can involve investors, lenders, or other stakeholders. Intentional concealment is treated differently than negligent omission — most policies address this distinction in their fraud exclusion language.

Fraud Allegations A common allegation in D&O claims. Most policies will advance defense costs even when fraud is alleged — the exclusion typically does not apply unless and until there is a final, non-appealable judgment establishing that fraud actually occurred. If fraud is ultimately adjudicated, coverage may end and the insurer may seek reimbursement of costs already advanced.

Derivative Demands When shareholders or owners ask the company's board to take legal action against one of its own directors or officers. Even if no lawsuit is ultimately filed, responding to and investigating a derivative demand can generate significant costs. Some policies cover investigation costs for derivative demands — and the scope of that coverage, including whether sublimits apply, varies.

Personal Liability A defining feature of D&O coverage — it protects individual directors and officers when they are personally named in a claim. Without this protection, personal assets can be at risk. Side A coverage exists specifically for this purpose.

Regulatory Violations Claims alleging that leadership broke a rule, regulation, or law through negligence or oversight. In franchising this can include FTC disclosure requirements, state franchise laws, or other regulatory obligations that fall under leadership's responsibility rather than professional service delivery.

Defense Costs The legal fees and expenses incurred to defend a covered claim. In many D&O policies, defense costs are included within and reduce the overall limit of liability. Some policies offer defense costs outside the limit — meaning legal fees don't erode the amount available to pay a settlement or judgment. This distinction is worth paying close attention to when comparing policies.

Retention Your out-of-pocket amount before the insurance responds, similar to a deductible. Retentions apply differently across the three insuring clauses — Side A claims often carry a $0 retention since they involve individuals who may not have the company's financial backing.

Consent to Settle A provision giving you input before the insurer settles a claim on your behalf. Some policies include a "hammer clause" — if you decline a settlement the insurer recommends, your coverage may be capped at that amount going forward. Some policies use a modified version where the insurer covers a set percentage (commonly 80%) of future costs if you decline, rather than cutting off coverage entirely.

Limit of Liability The maximum amount the insurer will pay under the policy. Understanding whether defense costs are inside or outside this limit is important, since legal fees in D&O matters can be substantial and can quickly reduce the amount available to resolve a claim.

COMMON EXCLUSIONS

Franchisee Exclusion Some D&O policies include an exclusion that eliminates coverage for claims brought by franchisees. This is a significant gap to be aware of, since franchisees can be a source of D&O claims — particularly those involving leadership decisions that affected them. Not all policies include this exclusion, and some specifically remove it.

Insured vs. Insured Exclusion An exclusion that applies when one insured party sues another — for example, the company suing its own officers, or one director suing another. Most policies include exceptions to this exclusion for certain situations, such as derivative actions brought independently by shareholders, claims by former directors, or claims initiated by a bankruptcy trustee.

Fraud & Deliberate Misconduct Intentional dishonest, fraudulent, or criminal acts are excluded. As noted above, most policies advance defense costs while the matter is unresolved and only apply this exclusion after a final adjudication. When this exclusion does apply, the insured is typically required to reimburse the insurer for costs already advanced.

Prior-Acts / Known Circumstances Wrongful acts that occurred before the continuity date, or that were known to leadership before coverage began, are typically excluded. What was known and when it was known — as documented in the application — is central to how this exclusion gets applied.

Employment-Related Claims D&O policies do not cover claims arising from employment practices — wrongful termination, discrimination, harassment, wage disputes, and similar matters. Those belong on an Employment Practices Liability (EPL) policy. Many programs combine D&O and EPL under the same policy form and carrier, which simplifies how claims that involve both leadership decisions and employment actions get handled.

Pollution Exclusion Claims involving pollutants are excluded from D&O coverage, consistent with most management liability policies. Some policies carve back coverage for shareholder derivative actions related to pollution events.

Securities Exclusion Claims arising from the Securities Act of 1933, the Securities Exchange Act of 1934, or similar securities laws are typically excluded on private company D&O policies. Public company D&O (Side C) is specifically designed to address securities claims and is a different product.

OTHER IMPORTANT TERMS

Other Insurance Clause Explains how the D&O policy interacts with other insurance you carry. D&O is typically structured as excess over other applicable coverage. When D&O and E&O are with separate carriers and a single claim triggers both, competing "other insurance" clauses can create conflict between the two carriers over which responds first — sometimes referred to as a denial war. Placing both policies with the same carrier under a shared framework is the most effective way to avoid this.

Allocation When a claim involves both covered and uncovered matters — or both covered and uncovered parties — the insurer and insured work together to determine a fair allocation of costs. Most policies commit the insurer to advancing 100% of defense costs while allocation is being negotiated, with a final split determined based on relative legal and financial exposure.

Severability A provision that prevents one insured's knowledge or conduct from being used against other insureds. If one officer knew about a problem and didn't disclose it, severability helps protect innocent directors and officers from losing coverage because of someone else's actions.

This guide is for general informational purposes only and is meant to help you understand common insurance terms. It does not provide insurance coverage, interpret your specific policy, or guarantee how any claim will be handled. Every claim is reviewed based on the specific facts, policy language, and circumstances involved. Always refer to your actual insurance policy or speak with your broker for guidance.