Directors and Officers Insurance

Did you know that your Board of Directors and Officers could be held personally liable if they’re accused of wrongful acts or they’re the subject of a lawsuit? Directors & Officers (D&O) Liability helps by covering the defense costs and awards and settlements (damages) from these claims.

Even though a Business Insurance policy will provide coverage for the business, the company’s officers could still be held liable or sued for their assets in a claim. This is where Directors and Officers Insurance comes in to provide additional protection.

Though a company’s officers must act in the best interest of their shareholders while abiding by the law, mistakes can happen, or the officers’ acts and intentions may be misinterpreted. There could even be instances where the executives failed to exercise reasonable care, which is all potentially covered under D&O insurance

What Does It Cover?

Due to the complex nature of some of the claims and the structure of the organizations, D&O insurance provides a broad range of coverage for perceived “wrongful acts.” Some of the most common claims include:

• Securities litigation
• Poor stock performance
• Regulatory actions
• Allegations of misrepresentation
• Breaches of fiduciary duties
• A company officer makes decisions beyond his authority
• Failure to comply with laws or regulations
• Employment practices and HR-related issues
• Claims of pollution and other violations
• Cyber liability

The above claims fall into these coverage categories, and we’ve included a small list (though not comprehensive) of examples:

• Wrongful Acts: violations of statutes, conflict of interest, misrepresented financial statements
• Improper Management Suits: Inefficient administration, poor judgment when selling assets, overextending credit
• Errors in Judgment: Disclosing material facts, releasing false reports
• Duty Negligence: Failure to file reports, not noticing embezzlement
• Coverage of Fines, Penalties, and Legal Costs: Government investigations, agency investigations

Here’s the coverage you can expect from D&O Insurance:

• If the company doesn’t have enough assets to satisfy a claim, the plaintiffs may try to attach the directors’ assets. D&O helps prevent that from happening or the insurance will provide funding as part of the claim.
• If the company loses the suit, this insurance will reimburse the organization.
• If both the directors and the company are named in a securities lawsuit, “entity coverage” applies, which ensures proper allocation of coverage between all parties.

Does My Company Need It?

If your business relies on top talent in an executive capacity, you’ll need D&O Insurance to attract and retain top talent.

Some of the businesses that carry D&O Insurance include:

• Financial Institutions
• Nonprofit Organizations
• Educational Institutions
• Private Companies
• Public Companies

Companies that undergo mergers and acquisitions, have volatile earnings, or a potential conflict of interest can find themselves in the middle of a lawsuit. The company’s directors’ and officers’ assets may be at stake. To add insult to injury, even a spouses’ assets can be at risk.

The statistic that 70% of directors and officers have inquired about their coverage should be a clear warning sign that this type of protection is a requirement for organizations with an executive team or board.

There are definite advantages to carrying this policy, including:

• Talent attraction and retention: Top talent may shy away from an employment opportunity if they know their personal assets can be stripped from them if something goes wrong with the organization, even if it’s not their fault.
• Attract investments: To get venture capitalists and private equity firms to invest in your company, you may need to carry D&O insurance.
• Legal fee coverage: Even if your company is found innocent, the legal fees can be substantial, and potentially crippling.

What It Does Not Cover

Coverage applies when the company acts in good faith. If the company and its representation intentionally commit fraud or breaks the law, coverage will not apply.

Here are some examples of acts that would void coverage:

• Fraud
• Personal profiting
• Illegal compensation exclusions, including account of profits
• Pending and prior litigation
• Bodily injury and property damage
• Prior or late claim notice
• ERISA (Employee Retirement Income Security Act)

Claim Examples: How Coverage Works

One example would be a supplement company selling a product for back pain. If they promise to “cure” the condition without providing proper data, studies, and evidence, they could be sued by customers who fail to notice an improvement or resulting decrease in their symptoms. The company’s D&O policy would provide coverage for this claim and the resulting lawsuit.