Directors and Officers Coverage is part of Executive Liability. The other two components are Employment Practices Liability and Fiduciary Coverage.
This blog post will focus on reasons why corporations:
- from the largest to the smallest
- from the Nonprofit to the For-Profit
- from the closely held to the public corporation
need to understand the risk involved and how D&O insurance coverage can close a coverage “gap” in your business insurance program.
“The biggest problem with communication is the illusion that it has taken place.” I came across this quote recently and it reminded me of this topic…. People assume they have D&O coverage because they spoke with their agent several months ago and they pay their insurance premium on time. Let’s look a little closer……
When it comes to business insurance we often talk about protecting the assets of the corporation. A few examples include:
- building coverage
- business personal property
- business auto
- general liability in case someone is injured on your property or one of your completed products fails
- work comp in case an employee is injured on the job and needs medical attention and/or is out of work
- umbrella liability
- etc, etc, etc…..
All of the above-mentioned insurance is important; however, it is also important to talk about protecting the assets of the people who lead these organizations. The actions and, equally as important, the in-actions of directors and officers (see a partial list below) can impact every single person and every single entity that comes into contact with the corporation.
Cost to defend: Even when allegations against directors and officers are unfounded, thousands of dollars are often spent to defend them. If there is no Directors and Officers (D&O) insurance coverage in place, you can win the lawsuit but also lose by being forced to spend a lot of money personally defending yourself. This is NOT covered in a General Liability policy.
Nonprofit Organizations (NPO): Most people will not volunteer to serve on a volunteer board unless the organization carries D&O coverage because they do not want to be exposed to the personal liability that comes with it. In a tough ecomony, many nonprofit boards are forced to make budget and staff cuts. These decisions impact all stakeholders.
Large for-profit corporations: Lawsuits can be brought by other shareholders, employees, the government, competitors, vendors, etc for actions taken and not taken. Typically, a corporation AND its directors and officers will be brought into a lawsuit. You would want to insure both, correct?
Small to medium size for-profit corporations: This is an area of particular concern. Directors and officers of the corporation are faced with many of the same challenges and risks as NFP’s and large corporations, correct? Some would argue that people at smaller corporations wear more hats and make a wider range of decisions in their role as a director or officer of the corporation. In many cases, they do so without the large legal teams that large corporations are able to retain. The challenge is that their decision are of no less consequence.
Listed below are just a few of the many reasons why privately held businesses of all sizes need D&O coverage. In each case, there have been lawsuits brought – in each instance one of two things happened:
- the D&O coverage responded and covered the expenses of the entity and related to this or the individual directors and officers
- the entity of the individual had to cover their expenses on their own.
The following have been alleged against directors and officers:
1. Fraudulent conduct
2. Corporate debts and delinquencies
3. Permitting corporate libel or slander
4. Failure to verify facts in official documents before signing and filling them.
5. Unfair competition
6. Acts beyond corporate powers
7. Failure to detect embezzlement of corporate funds
8. Improper repurchases of stock
9. Permitting the corporation to make improper guarantees
10. Transactions between corporations having common directors
11. Failure to require withholding in connection with Social Security and income tax
12. Anti-trust violations
13. Inducing the corporation to commit breach of contract
14. Acts of the executive committee
15. Conflicts of interest
16. Continual absence from meetings
17. Causing corporation to incur unnecessary tax liabilities
18. Failure to file an annual report
19. Failure to disclose material facts
20. Excessive dividend payments
21. Excessive compensation and benefits paid to directors and officers
22. False or misleading reports
23. Inefficient administration resulting in losses; including failure to supervise otherwise in a proper manner
For more information about Directors and Officers Coverage and/or Executive Liability, please contact your independent insurance agent or give me a call at (815) 979-4045.
Rockford’s Insurance Coach
Disclaimer: This article is for informational purposes only. There is no legal advice being suggested or offered. The author assumes no responsibility or liability for the actions take or not taken by the readers based upon the above-mention information.