Directors & Officers (D&O) insurance helps protect your company, executives, and board members when they’re accused of wrongdoing in how the business is run. This includes decisions made at the leadership level — from mismanaging finances to misleading investors, employees, or franchisees.
This article explains key D&O insurance terms in plain English and is tailored to the risks and realities franchisors face.
Insuring Agreements
Describes who is protected — typically the company (franchisor), its directors, officers, and sometimes employees or affiliates.
Derivative Demands
When shareholders want the company to take legal action against a leader. Good policies cover investigation costs (ideally without sublimits).
Wrongful Acts
Covers things like poor decisions, mismanagement, or misleading statements. This is the core of most D&O policies.
Failure to Provide Services
Protects you if someone claims your franchisor obligations (like support or training) weren’t fulfilled — often included under “wrongful acts.”
Mismanagement
Covers claims that your leadership team failed to properly run or oversee operations — including franchise system performance or finances.
Franchisee Exclusion
Some D&O policies exclude lawsuits from franchisees. This is a major red flag and should be avoided or narrowed. This ultimately eliminates all coverage that you thought you had.
Personal Liability
Protects individual directors and officers when they’re personally named in a lawsuit.
Fraud Allegations
Defense is covered until fraud is legally proven. If found guilty, coverage usually ends and may require repayment.
Misrepresentations
Covers unintentional or negligent false statements — not deliberate fraud.
Non-Disclosure
Covers accidental failure to share important information. Intentional omissions are not covered.
Regulatory Violations
Covers claims related to breaking laws or rules due to negligence (e.g., franchise disclosure mistakes).
Other Insurance Clause
Explains how this policy interacts with others. D&O is typically excess coverage unless no other policy applies. It's best to keep your E&O and D&O policies with the same carrier to avoid “Denial Wars”.
Consent to Settle
Details how settlements are approved. Look for a “capped hammer clause” — often 80% insurer / 20% insured if you refuse a recommended settlement.
Defense Costs
Pays legal fees to defend a claim. Stronger policies pay these outside the limit, so they don’t eat into total coverage.
Retention
Like a deductible — what your company pays first. “Side A” claims often waive this.
Limit
The maximum the insurer will pay. Important to know whether defense costs reduce this limit.
Reporting Period & ERP (Extended Reporting Period)
How long you have to report claims. ERP gives extra time if your policy ends — useful after leadership changes or company sale.
D&O-Specific Concepts
These apply only to D&O policies and help franchisors evaluate unique executive risk:
Side A / B / C Coverage
Side A: Covers individuals when the company can’t reimburse them.
Side B: Reimburses the company after it pays for a director/officer’s defense.
Side C: Protects the company itself (usually public companies).
Runoff Coverage
Special ERP that activates during events like a sale, merger, or leadership exit. Covers past actions after the policy ends.