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D&O Insurance

D&O Insurance vs Fidelity Bond – What is the Difference?

By February 23, 2022April 13th, 2022No Comments

Business and corporate insurances are of different types. Each insurance or bond helps in protecting the distinct financial interest of the corporate and the high-ranked executives. The Director and Officers’ policy and the Fidelity bond also fall under the corporate policy category. But the coverage aspects and features of the policies make them distinctive. So, if you have a business or own a company, you have to keep a fair idea of the different business policies available out there. Reading this will help you get a clarified idea of the D&O policy and Fidelity bond and also understand the key differences. 

Understanding the Fidelity bond

Fidelity bond is an essential risk management insurance for businesses and companies. Businesses and organizations are always at risk of financial fraudulence. Such unwanted incidents can cause huge losses. The fraudulent actions by the employees can also reach an extreme and shut the business or organization. For overcoming and managing such risks, the Fidelity Bond is the one-stop solution. 

Fidelity bond insurance safeguards the business or organization from the financial losses generated from fraudulent activities of the employees or an individual. In simple words, the insurance covers the dishonest actions of the associated employees. 

Understanding the D&O policy

The D&O policy, as the name suggests is insurance that caters to the high-ranked officials and directors in an organization. The policy offers coverage for the personal liabilities of the executive professionals if they face any legal allegations, in context to their wrongful actions. Every director or high-ranked officer in an organization has a set of professional duties and responsibilities that they must follow. They are liable and answerable to the employees, stakeholders, consumers, regulatory bodies, and others dependent on the company. If there is mismanagement in their duties or wrongful action, causing financial damage, they can get legally charged. 

In such situations, the singular way to defend their honor and relieve themselves of the allegations is to seek the legal course. Legal proceedings and defense actions are costly and can drain the personal assets of the high-ranked executive officer or director. The D&O policy acts as a rescuer in such times. The policyholder(officer or director) can get financial support and reimbursement for the legal expenditure during the defense proceedings and any settlement charges. The insurer is bound to pay for the charges under the policy agreement norms. 

Comparing the coverage aspects

When you discuss the differences between the two policies, you have to go through the coverage aspects. What is the purpose of buying insurance? The direct answer is – to get the coverage when applicable. So, to understand how each policy works, take a look at the varied coverage aspects – 

In Fidelity Bond – Most people know of the Fidelity bond as the insurance resource that covers the fraudulent activities of the employees in an organization. But there are other coverage scopes as well. With the Fidelity Bond, the customers at the receiving end of the fraudulent actions can also get coverage. Following are the coverage areas for a Fidelity Bond – 

  • Forgery: Covers for forgery incidents like counterfeiting signature to transfer lump sum from the customer or company’s account
  • Asset: Illegal transfer of a valuable asset of the company and unauthorized access
  • Identity: Employees stealing identity data from the company’s server and shared drives
  • Theft by consumers: Customer claims in the context of employees stealing valuable assets from them or the client

In D&O insurance – In the D&O insurance, the executive rank holders can get direct financial coverage if there are any legal allegations made against them in the context of their action. The policyholder can approach the insurer and claim for reimbursement for the legal cost and other settlement fees for the following reasons – 

  • Defense cost to combat legal allegations related to – Negligence, breach of corporate duties and responsibilities, discrimination, wrongful acts, mismanagement, accounting irregularities, misstatement, etc.

Types of Fidelity bond

Fidelity bonds can be of different types, based on the coverage aspects. You can purchase the policy for the following reasons and get claim coverage – 

  • 1st party coverage – To get coverage for the losses generated by the company as a result of the wrongful actions by the employees working there
  • 3rd party coverage – Coverage for the claims brought by the clients and consumers, who have incurred financial losses for fraudulence business activities
  • Blanket bond – This coverage works for all the employees present in the company

Types of D&O agreements

The agreements in the D&O policy define the different types of the D&O insurance policy. There are three types of agreements or sides in the D&O policies that help in distinguishing-

  • Side – A: Caters to a person holding high-ranked designation (officer or director) and safeguards their asset when charged with a legal allegation for a breach in their duties.
  • Side – B: Corporate reimbursement coverage or Side-B of the D&O policy caters to the organization and meets the legal charges when there are lawsuits against the organization due to wrongful action by the management. 
  • Side – C: The entity securities coverage as defined in the Side-C agreement clause of the D&O policy is for the publicly listed organizations and private companies to safeguard them from liability exposures.

Comparing advantages

Both the insurance policies have separate advantages. It depends on the business to utilize the benefits in their own way. With the Fidelity Bond, the primary advantage is risk management. It ensures financial stability in the company or business in the worst situations. While with the D&O policy, it ensures financial stability to the high-ranked officials during legal allegations. Both are essential for businesses and companies with their different coverage regulations.

The ultimate purchasing decision

If you have confusion with the coverage and exclusion areas of the policies, it is best to consult an insurance expert. The insurance brokers who sell these liability coverage plans can guide you with the best advice and ease your decision-making. 

Get what you require with PlanCover.

The high-rated insurance broker company, PlanCover brings the best liability insurance plans for businesses and organizations. Talk to the proficient team to understand the features of the policies before you buy one. Find the right D&O policy that meets the requirements and matches the criteria you have in mind. 

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