Directors & Officers Liability Insurance for Real Estate Companies: Protecting Leadership from Personal Exposure

The managing partners of a real estate private equity fund raised $45 million from 30 investors to acquire and operate a portfolio of multifamily properties. Three years into the fund's life, property values declined due to market conditions, and projected returns fell short of the offering memorandum projections. Several investors sued the general partners personally, alleging misrepresentation of market conditions, failure to properly underwrite properties, and breach of fiduciary duty.

The lawsuit sought $8 million in damages from the partners individually. The firm's general liability policy denied coverage—the claims alleged management failures and misrepresentation, not bodily injury or property damage. Fortunately, the partners had purchased Directors & Officers (D&O) liability insurance, which provided legal defense and ultimately paid a $2.3 million settlement. Without D&O coverage, the partners would have faced personally devastating financial exposure.

This scenario illustrates why D&O insurance has become essential for real estate companies, particularly those with outside investors, public shareholders, or complex organizational structures. Unlike other liability policies that protect the company, D&O insurance specifically protects the personal assets of directors, officers, and sometimes the entity itself from claims alleging wrongful acts in their management capacity.

What Is Directors & Officers Liability Insurance?

Directors & Officers (D&O) liability insurance protects individuals serving as directors, officers, or managers of organizations from personal liability arising from their management decisions and actions. It covers legal defense costs and settlements or judgments when they're sued for alleged wrongful acts in their management capacity.

Who Is Covered?

Directors and officers: Board members and corporate officers (CEO, CFO, COO, VP-level executives)

Managers and managing members: For LLCs, managers and managing members who exercise equivalent authority to corporate directors and officers

Committee members: Individuals serving on audit committees, compensation committees, or special committees

Employees acting in management capacity: Senior employees making significant operational or strategic decisions

Former and future directors/officers: Coverage typically extends to individuals who previously served in covered positions and those who will serve in the future

Outside directors: Independent board members who don't work for the company day-to-day face particular exposure and especially need D&O protection

Core Coverage: Wrongful Acts

D&O policies cover "wrongful acts"—a broadly defined term typically including:

Errors and omissions: Mistakes or oversights in managing the organization

Misstatements or misleading statements: Alleged misrepresentations to investors, lenders, or stakeholders

Breach of fiduciary duty: Failing to act in the best interests of shareholders, investors, or beneficiaries

Negligent oversight: Failing to properly supervise employees or operations

Breach of trust: Violating duties owed to stakeholders

Employment practices violations: Wrongful termination, discrimination, or harassment allegations against executives (though dedicated EPLI coverage is often preferable)

Regulatory violations: Actions by regulatory bodies alleging corporate governance failures

A critical distinction: D&O insurance covers alleged wrongful acts regardless of whether the allegations are ultimately proven true, providing defense costs even for meritless claims. This is essential because even successfully defending unfounded allegations can cost hundreds of thousands in legal fees.

Why Real Estate Companies Need D&O Insurance

Several factors make D&O coverage particularly important for real estate firms:

Fiduciary Duties to Investors

Real estate companies with outside capital face significant fiduciary duty exposure:

REITs: Public and private REITs owe fiduciary duties to shareholders and face securities litigation risk. Shareholder derivative suits and class actions are common in the REIT sector.

Private equity funds: General partners owe fiduciary duties to limited partners and face claims when returns disappoint or investment strategies shift.

Syndications and joint ventures: Sponsors and general partners managing investor capital face claims alleging mismanagement, misrepresentation, or failure to deliver projected returns.

Institutional partnerships: When partnering with pension funds, insurance companies, or other institutions, governance expectations and liability exposure increase substantially.

A private REIT sponsor raised $120 million from accredited investors to acquire office properties. When interest rate increases reduced property values and rental markets softened, the REIT's net asset value declined 25%. Multiple investors sued the sponsor and board members personally, alleging the offering materials overstated income projections and failed to adequately disclose interest rate risks. The D&O policy defended the suit and ultimately paid a $3.8 million settlement, protecting the directors' and officers' personal assets.

Securities Litigation Exposure

Real estate companies raising capital face securities-related claims:

Offering memorandum claims: Investors allege misrepresentations or omissions in private placement memoranda

Prospectus claims: Public REITs face claims that prospectuses contained misleading information

Financial reporting claims: Allegations of improper accounting, overvalued assets, or understated liabilities

Disclosure failures: Claims that material information wasn't properly disclosed to investors

Securities claims are particularly dangerous because:

• They often involve multiple plaintiffs (class actions)
• Defense costs are extremely high
• Settlement or judgment amounts can be substantial
• Personal liability attaches directly to directors and officers

Employment Practices Claims Against Leadership

While Employment Practices Liability Insurance (EPLI) is preferable, D&O policies often provide backup coverage for employment claims against executives:

Wrongful termination: Fired employees sue executives personally for wrongful termination

Discrimination and harassment: Claims that executives engaged in or enabled discriminatory practices

Retaliation: Employees claim retaliation for whistleblowing or complaining about illegal conduct

Wage and hour violations: Class actions alleging systematic wage violations directed by leadership

A property management company's CFO terminated several accounting employees and restructured the department. Three terminated employees sued the CFO and CEO personally, alleging age discrimination and retaliation for questioning accounting practices. The D&O policy covered the executives' defense costs of $185,000 and a $120,000 settlement.

Corporate Transaction Claims

Real estate acquisitions, mergers, and dispositions create D&O exposure:

Shareholder challenges to transactions: Shareholders claim directors breached fiduciary duties by approving inadequate sale prices or unfavorable terms

Post-acquisition disputes: Buyers claim seller's management misrepresented property conditions, financials, or prospects

Fairness opinion challenges: Claims that transaction fairness opinions were flawed or that directors improperly relied on them

Conflict of interest allegations: Claims that directors or officers benefited personally from transactions at shareholder expense

A publicly-traded REIT board approved a merger at $18 per share. Shareholders sued, claiming the board breached its fiduciary duty by failing to adequately shop the company and accepting an undervalued offer. After extensive litigation, the case settled for $4.5 million. D&O insurance covered the defense costs (exceeding $1.2 million) and the settlement.

Regulatory and Compliance Actions

Real estate companies face increasing regulatory scrutiny:

SEC investigations: For public REITs and companies raising capital, SEC investigations into disclosure practices, accounting methods, or offering materials

HUD and fair housing claims: Allegations of fair housing violations directed at company leadership

Environmental regulatory actions: Personal liability for environmental violations, particularly if regulators allege knowing violations or failure to remediate

State securities regulators: Investigations by state securities commissioners regarding capital raising activities

Even when regulatory actions don't result in fines or penalties, defense costs can be substantial. D&O policies typically cover defense costs for regulatory proceedings.

Bankruptcy and Insolvency Litigation

When real estate companies face financial distress:

Fraudulent transfer claims: Trustees or creditors sue directors and officers claiming improper asset transfers before bankruptcy

Preference claims: Claims that management gave preferential treatment to certain creditors

Deepening insolvency claims: Allegations that directors allowed the company to continue operating when they should have filed bankruptcy, increasing creditor losses

Breach of fiduciary duty to creditors: When companies approach insolvency, fiduciary duties shift from shareholders to creditors, creating additional liability exposure

A highly-leveraged real estate developer filed bankruptcy after failing to refinance maturing debt. The bankruptcy trustee sued the company's officers and directors, alleging they made substantial dividend distributions to shareholders during the year before bankruptcy when the company was already insolvent. The claim sought to recover $6 million in distributions from the directors and officers personally. D&O insurance defended the claim and negotiated a settlement.

D&O Coverage Structure: Side A, B, and C

D&O policies have three distinct coverage components, called "Sides":

Side A: Individual Coverage

Protects directors and officers personally when the company cannot indemnify them:

When Side A applies:

• Company is financially unable to indemnify (bankruptcy, insolvency)
• Law prohibits indemnification for certain acts
• Company refuses to indemnify
• Individual settlements differ from entity settlements

Key features:

• Pays directly to or on behalf of individuals
• No deductible applied to Side A in most policies (deductible is a corporate obligation)
• Often provides higher or unlimited limits through "Side A Difference in Conditions" (DIC) policies

Side A is the most critical coverage because it protects individuals' personal assets when they have no other recourse.

Side B: Corporate Reimbursement Coverage

Reimburses the company when it indemnifies directors and officers:

When Side B applies:

• Company is legally required or permitted to indemnify directors and officers
• Company has actually paid indemnification to individuals
• Claim is covered under the D&O policy terms

Key features:

• Pays to the company, not individuals
• Subject to corporate deductible
• Protects company assets by reimbursing indemnification costs

Side C: Entity Coverage

Covers the company itself for securities claims:

When Side C applies:

• Company is named as defendant in securities litigation
• Claims arise from securities law violations
• Public offerings, private placements, or shareholder disputes

Key features:

• Covers entity directly for securities claims
• Subject to deductible and often has sublimits
• Sometimes excluded or limited in private company policies

Example showing how the sides work together:

Investors sue a real estate fund's general partners and the fund entity alleging misrepresentation in the offering memorandum. Total defense costs and settlement: $4 million.

• Side C: Covers the entity's defense and settlement costs ($1.5 million)
• Side B: Reimburses the company for indemnification paid to the general partners ($2 million)
• Side A: Covers one general partner who negotiates a separate individual settlement the company doesn't indemnify ($500,000)

All three sides work together to provide comprehensive protection.

Determining Appropriate D&O Limits

Selecting adequate D&O limits requires analyzing multiple factors:

Company Revenue and Asset Size

Coverage limits should scale with organizational size:

Small companies (<$10M revenue): $1-3 million limits Medium companies ($10-50M revenue): $3-5 million limits Large companies ($50-250M revenue): $5-15 million limits Very large companies (>$250M revenue): $15-25 million+ limits

These are general guidelines; actual needs depend on additional factors below.

Capital Structure and Investor Base

Outside capital increases exposure:

No outside investors: Lower limits may suffice (though officers still face employment claims and other exposures)

Friends and family capital: Modest limits ($1-3 million) provide basic protection

Accredited investor capital: As capital raises grow, limits should increase proportionally. A reasonable approach: Coverage equal to 5-15% of capital raised

• $10 million raised: $1-2 million D&O coverage
• $50 million raised: $3-7 million D&O coverage
• $100 million+ raised: $10-15 million+ D&O coverage

Institutional capital: Pension funds, endowments, and insurance companies often require minimum D&O limits (commonly $5-10 million) as a condition of investment

Public shareholders: Public REITs typically carry $10-50 million in D&O coverage depending on market capitalization

Number of Investors

More investors create more claim potential:

Single investor or small number: Limited plaintiff pool reduces exposure

10-50 investors: Moderate exposure; $2-5 million limits appropriate

50+ investors: Significant exposure; class action potential increases substantially; $5-10 million+ limits warranted

Transaction Activity

Acquisitions and dispositions create exposure spikes:

Active acquisition programs: Companies making multiple acquisitions annually face elevated exposure; consider increasing limits temporarily around major transactions

Portfolio sales: Selling properties or portfolios creates representation and warranty exposure; ensure adequate D&O limits during transaction periods

Going public or significant capital events: IPOs, major capital raises, or going-private transactions create substantial exposure requiring significantly increased limits

Industry Sector and Property Types

Certain property types create elevated exposure:

Affordable housing and HUD properties: Higher regulatory scrutiny and compliance obligations

Ground-up development: Construction cost overruns, delays, and completion risks increase claims potential

Value-add and distressed properties: More risk of underperformance vs. projections

Core stable properties: Lower volatility and more predictable performance reduce claim frequency

Historical Claims and Industry Benchmarks

Clean history: No prior D&O claims allow focus on exposure analysis

Prior claims: Previous claims may require higher limits and will certainly increase premiums

Industry data: D&O claims in real estate average $2-5 million when they occur, with high-severity claims reaching $10-25 million. Consider worst-case scenarios when selecting limits.

Premium Considerations and Cost Factors

D&O insurance costs vary substantially based on multiple factors:

Typical Premium Ranges

Private real estate companies:

• $1 million coverage: $5,000-$15,000 annually
• $3 million coverage: $12,000-$30,000 annually
• $5 million coverage: $20,000-$50,000 annually
• $10 million coverage: $40,000-$100,000 annually

Public REITs:

• $10 million coverage: $100,000-$300,000 annually
• $25 million coverage: $250,000-$750,000 annually
• $50 million+ coverage: $500,000-$1,500,000+ annually

Rating Factors

Company size and revenue: Larger companies pay more due to increased exposure

Capital structure: Companies with outside investors pay significantly more than closely-held firms

Public vs. private: Public companies face 3-5x higher premiums than private companies due to securities litigation risk

Claims history: Prior D&O claims increase premiums substantially (30-100%+)

Financial condition: Financially distressed companies face much higher premiums or may be unable to obtain coverage

Governance quality: Companies with strong corporate governance, independent boards, and robust compliance programs may receive premium credits

Deductibles: Higher deductibles (typically $25,000-$250,000 for private companies) reduce premiums by 10-30%

Industry and property types: Riskier property types or business models increase premiums

Key Policy Provisions and Considerations

Definition of Wrongful Act

Ensure "wrongful act" is defined broadly to encompass all potential claim types relevant to real estate management.

Prior Acts Coverage

Verify the policy covers wrongful acts that occurred before policy inception (subject to the retroactive date). When purchasing D&O coverage for the first time, the retroactive date is typically the policy inception date—meaning prior acts aren't covered. However, maintaining continuous coverage preserves your retroactive date.

Exclusions to Review

Fraud and intentional misconduct: Most policies exclude coverage for intentionally fraudulent acts, but provide coverage until fraud is proven

Profit or advantage: Some policies exclude coverage for profits or benefits to which the insured wasn't entitled

Bodily injury and property damage: D&O policies exclude these claims (covered under general liability)

ERISA claims: Some policies exclude employee benefit plan fiduciary claims; ensure these are covered if relevant

Environmental claims: Often excluded or limited

Insured vs. insured: Claims between insureds are often excluded; negotiate modifications if key stakeholders need protection

Allocation Provisions

When claims involve both covered and uncovered matters or both insured individuals and uninsured parties, allocation provisions determine how defense costs and settlements are divided. Favorable allocation provisions are critical.

Severability

Policies should include severability provisions ensuring that one insured's fraudulent conduct or policy violations don't void coverage for innocent insureds.

Extended Reporting Periods

When canceling D&O coverage (selling the company, retiring), consider purchasing extended reporting periods (tail coverage) allowing claims to be reported for years after policy expiration. This protects against claims arising from prior acts discovered and filed after coverage ends.

Entity Coverage Considerations

Beyond traditional D&O coverage, consider these entity coverages:

Fiduciary Liability Insurance

Covers fiduciary breaches related to employee benefit plans (401(k) plans, health plans). While D&O policies may provide limited fiduciary coverage, dedicated fiduciary liability insurance offers more comprehensive protection.

Crime/Fidelity Insurance

Covers employee theft, forgery, and fraud. Not a D&O policy component but complements D&O by addressing internal fraudulent acts.

Employment Practices Liability Insurance (EPLI)

While D&O policies provide some employment practices coverage for executives, dedicated EPLI provides more comprehensive protection for employment claims across all employee levels.

The Bottom Line: Protecting Personal Assets and Leadership

Directors & Officers liability insurance protects what other liability policies don't: the personal assets of your leadership team from claims alleging management failures, misrepresentations, or breach of fiduciary duty. For real estate companies—particularly those with outside investors, complex capital structures, or transaction activity—D&O coverage is essential, not optional.

Key takeaways:

Don't rely on entity coverage alone: General liability, professional liability, and property insurance don't protect individuals from D&O claims. Without D&O coverage, directors and officers face personal financial catastrophe.

Scale coverage to your capital structure: Companies with significant outside capital need robust D&O limits—generally 5-15% of capital raised or 10-20% of company value.

Understand the three-part structure: Side A protects individuals, Side B reimburses the company, Side C covers entity securities claims. Ensure all three sides provide adequate limits.

Maintain continuous coverage: D&O is claims-made coverage; gaps create permanent coverage holes. Maintain continuous coverage and preserve your retroactive date.

Review coverage during growth and transactions: As your company grows, raises capital, or pursues transactions, reassess D&O limits to ensure adequate protection.

Consider enhanced Side A coverage: For companies with elevated risk or significant outside capital, enhanced Side A or DIC policies provide additional protection when primary coverage exhausts.

Budget realistically: D&O insurance costs $5,000-$100,000+ annually depending on company size and structure. Factor this into operating budgets and investor returns.

Purchase before you need it: Once claims arise or financial distress emerges, obtaining D&O coverage becomes difficult or impossible. Purchase coverage when the company is healthy and performing well.

Directors and officers of real estate companies face substantial personal liability exposure that entity-level insurance doesn't address. D&O insurance provides the protection necessary to recruit quality board members and executives, satisfy investor and lender requirements, and protect the personal assets of those who guide your company's strategy and operations. For real estate firms with outside capital or complex organizational structures, it's not a luxury—it's a fundamental risk management necessity.