How Directors, Officers and Corporations Share Risk Under Directors and Officers (D&O) Liability Insurance

Directors and officers (D&O) liability insurance is a cornerstone of corporate risk management in the United States. It assigns financial responsibility for claims that allege wrongful acts by corporate leaders, and—crucially—defines how risk is shared among individual directors, officers and the corporate entity. This article explains the mechanics of that allocation, practical examples, cost drivers, and what boards in New York, California and Texas should look for when buying D&O coverage.

Quick overview: who faces D&O claims and why it matters

D&O claims in the U.S. commonly arise from:

• Securities lawsuits (public companies)
• Employment-related claims (wrongful termination, discrimination)
• Fiduciary breaches by board members
• Regulatory investigations and derivative suits

When a claim is asserted against an individual director or officer, the company, its indemnification obligations, and the D&O policy work together to pay defense costs, settlements, and judgments—and to preserve the personal assets of leadership.

The three “sides” of D&O coverage (how risk is carved up)

D&O policies are typically written with three components—Side A, Side B and Side C—each allocating who is protected and who the insurer pays.

Understanding these sides is the first step to seeing how risk gets shared: Side A protects individuals, Side B and C can shift costs back to the company (but are still paid by the insurer up to policy limits).

(For a deeper primer on policy anatomy, see: How Directors and Officers (D&O) Liability Insurance Works: Anatomy of a Policy for Board Members.)

Indemnification agreements and the priority of payments

Corporate bylaws and board-adopted indemnification agreements typically require the corporation to defend and indemnify its directors/officers if they are sued for actions taken in their corporate roles. The practical sequence is often:

1. Director is sued.
2. Company determines whether it will indemnify (many bylaws provide mandatory indemnification subject to legal defenses).
3. If indemnified, the company pays defense/settlement and then seeks reimbursement from its D&O policy (Side B).
4. If the company cannot indemnify (insolvency, bankruptcy, regulatory prohibition), Side A coverage protects the individual directly.

Priority and allocation issues can arise when a single D&O limit must satisfy both individual defense costs and an entity settlement. Many boards add a Side A Difference in Conditions (Side A DIC) or buy separate Side A limits to ensure executives have independent protection.

Real-world allocation examples

Example A — Private company (San Francisco, CA)

• Claim: Employment discrimination suit naming CEO and the company.
• Indemnification: Company agrees to defend and indemnify CEO.
• Payment flow: Company pays defense costs; D&O Side B reimburses company up to limits.
• Risk share: Company shoulders reputational and deductible exposure; insurer covers the defense (up to limits).

Example B — Public company (New York, NY) in securities class action

• Claim: Securities class action naming the company and several directors.
• Indemnification: Corporate charter allows indemnification, but regulators and public scrutiny may restrict direct corporate payments for securities losses.
• Payment flow: Entity coverage (Side C) pays settlements for the corporation; Side B reimburses indemnification for directors; Side A protects individuals for non-indemnifiable exposures.
• Risk share: Mixed—insurer funds most loss up to limits; company’s shareholders ultimately bear retained loss through deductibles, uninsured amounts and reputational cost.

Example C — Insolvent company (Houston, TX)

• Claim: Regulatory enforcement against a director; company insolvent and unable to indemnify.
• Payment flow: Side A pays the individual directly.
• Risk share: Insurer shoulders the burden; individual remains protected.

Pricing: what boards in New York, California and Texas should expect

D&O pricing depends on company size, industry, public/private status, revenue, claims history, and geographic risk environment. U.S. regional differences matter—New York and California typically have higher litigation activity and thus higher premiums for similar risk profiles than many other states.

Typical U.S. cost ranges (market references and broker data):

• Small private company (annual revenue under $10M): roughly $2,000 to $25,000 per year for a standard D&O package (limits often $1M–$5M). Source: Insureon small business marketplace and industry guides. (https://www.insureon.com/small-business-insurance/directors-officers)
• Mid-sized private company (revenue $10M–$500M): premiums commonly fall in the $25,000 to $150,000+ range depending on industry and claims sensitivity. Source: market broker commentary.
• Public companies: premiums vary widely; for mid-market publics premiums often run $150,000–$1M+, and for large publicly traded firms the D&O program can exceed $1M–$10M depending on market capitalization and risk. Large accounts often place with global carriers such as AIG and Chubb.

Carrier-specific examples (indicative ranges; actual quotes depend on underwriting):

• Hiscox: markets small business D&O and advertises accessible starting points for startups and small firms—annual premiums can start in the low hundreds to low thousands for very small, low-risk firms. Source: Hiscox small business D&O product page. (https://www.hiscox.com/small-business-insurance/directors-and-officers-insurance)
• Chubb / AIG / Travelers: dominant writers for mid-market and large public companies. For board programs, incumbents often quote higher enterprise-level pricing—mid-six-figure programs are common for mid-market public companies (market-broker estimates).
• Insureon / Specialty MGAs: offer comparative small-business quotes; expected mid-market pricing shown above. (https://www.insureon.com/small-business-insurance/directors-officers)

Note: premiums showed meaningful volatility over 2018–2023 due to broader D&O market hardening, increased securities litigation, and macroeconomic claims frequency. For the most accurate pricing in Manhattan vs. Silicon Valley vs. Houston, obtain brokered quotes—location influences underwriting through litigation environment and regulator activity.

(For context on policyholders and when organizations need D&O, see: Who Buys Directors and Officers (D&O) Liability Insurance and When You Really Need It.)

Practical purchasing considerations for boards in the U.S.

• Ask for explicit Side A limits or Side A DIC if executives want independent protection (especially important for startups and insolvent companies).
• Confirm defense allocation methodology and whether defense costs erode the limit (they typically do).
• Review indemnification agreements: ensure bylaws and D&O policy terms align on advancement of defense costs.
• Consider excess D&O layers for public companies: a primary D&O layer (often $5M–$20M) with multiple excess layers to reach program limits typical of larger firms.
• Get regional advice: boards in New York and California should budget higher premiums and stronger Side A protection due to aggressive plaintiff activity.
• Obtain multiple, brokered quotes and insist on carrier claim examples and local litigation experience.

(See a practical checklist to check whether you need D&O: Quick Checklist: Do You Need Directors and Officers (D&O) Liability Insurance for Your Organization?.)

Common disputes and how insurance resolves them

• Coverage vs. indemnification battles: If the company refuses to indemnify, Side A protects individuals. If the company indemnifies, Side B reimburses the company.
• Limit exhaustion: When limits are insufficient to satisfy all claimants, Side A policyholders can be left unprotected—hence many boards buy dedicated Side A limits.
• Priority of payments among multiple claimants: policy language controls—always confirm how settlements and defense costs are allocated across insureds.

Where to go next (sources and further reading)

• Hiscox — small business D&O overview and product specifics: https://www.hiscox.com/small-business-insurance/directors-and-officers-insurance
• Insureon — small business D&O cost and marketplace guidance: https://www.insureon.com/small-business-insurance/directors-officers
• Investopedia — D&O fundamentals and common claim types: https://www.investopedia.com/terms/d/d&o-insurance.asp

Bottom line

D&O insurance is a layered partnership between individual directors/officers, the corporate entity, and the insurer. Effective programs clearly define the role of Side A vs Side B vs Side C, secure appropriate limits for the company’s risk profile, and match indemnification language to policy mechanics. Boards in New York, California and Texas should budget for higher premium environments, consider dedicated Side A protection for personal exposure, and use a broker with local litigation experience to structure a defensible and efficient program.

For a deep dive into policy definitions, common claim types and sample scenarios, see: Primary Loss Types Covered by Directors and Officers (D&O) Liability Insurance: Securities, Employment and More.