Directors & Officers
Private Directors and Officers Liability (D&O) policies are generally combined policies including D&O and Employment Practices Liability (EPL). Although they are typically marketed as Directors & Officers policies, and there are definitely D&O claims, claims frequently come from the Employment Practices Liability side of the form. Private Directors & Officers carriers find it challenging to cope with the high frequency of Employment Practices Liability claims that come with this line of business.
The premiums associated with these policies have been creeping up over the past few years, and now is an appropriate time to investigate and report on the causes. Rather than give you generalities that claims are frequent, here is some of the data that supports what the insurers are telling us.
|2012 EEOC Complaints|
|Top Five States||Total Complaints||Percent Change Since 2010||2010 Total Complaints||Total Population 2010*|
|Year Total||Total Complaints - All 50 States|
* The population totals are included to show that the highest volume of claims generally come from the largest states.
As seen in the chart below, the number of bank failures in 2011 dropped from the highs of 2010 and 2009.
But the number of bank failures in 2011 is still significantly greater than the relatively low numbers prior to 2008. In recent years, the Federal Deposit Insurance Corporation (FDIC) has authorized suits in connection with 54 failed institutions, naming 469 individuals for Directors and Officers (D&O) liability with damage claims of at least $8 billion. This includes 27 filed D&O lawsuits naming 222 former directors and officers. However, the FDIC doesn’t file an action against the directors and officers of a bank just because the bank fails. In fact, the FDIC only brought claims against the directors and officers of 24% of the bank failures from 1985 to 1992.
Statute Of Limitations
When they act as a receiver, the FDIC has three years from the time a bank is closed to file suits for tort claims and six years to file breach-of-contract claims. If there is a longer statute of limitations permitted in a specific state, the longer statute is followed. Prior to bringing an action, the FDIC conducts an investigation into the causes of the failure. The investigations are generally completed within the first 18 months following the closure of the institution.
The FDIC will often seek a settlement prior to filing the claim in order to manage expenses. Available assets and potential insurance proceeds are considered when the FDIC contemplates filing suit and seeking damages.
|FDIC Suits||Authorized D&O Defendants||Damage Claims ($ millions)*|
|Authorized in 2009||11||$366|
|Authorized in 2010||98||$2,123|
|Authorized in 2011||264||$5,110|
|Authorized in Q1 2012||96||$401.1|
* Losses typically exceed these amounts and may result in higher damage claims in filed lawsuits. Recovery on these claims is dependent upon available recovery sources, such as insurance and personal assets, and competing claims. http://www.fdic.gov/bank/individual/failed/pls/index.html
Directors' & Officers' Liability Coverage — The Basics
Directors' & Officers' (D&O) liability has become an increasingly core coverage for many companies, regardless of size, type, non-profit/for-profit status, and rightfully so. Considering our litigious society, and today's difficult economic environment, D&O coverage should be an essential part of your insurance program.
Typical D&O coverage provides for "any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an Insured Person in the discharge of his/her duties." In basic terms, D&O policies are designed to provide financial protection for your directors and officers while performing their duties as relates to their company.
Directors' & Officers' Liability — The Risks
Common activities and situations in which D&O coverage would come into play:
- Conflicts of Interest — many executives serve on multiple boards and/or have investment portfolios that could potentially create conflict of interest situations. Non-profit board members, in particular, are more likely to be affiliated with a number of organizations within their communities, both professionally and personally, placing them at additional risk. Be certain your company adopts and enforces formal Conflict of Interest policies that all members must adhere to.
- Information Disclosure — the SEC has specific requirements that all publicly traded firms must follow as to when and how information is released and broadcast to the public. In addition, your employees and other directors and officers have certain expectations regarding confidentiality. Breach of these regulations, rules or expectations may open your company up to both civil and criminal suits and judgments. Ensure your company has strict, written protocols regarding the dissemination of information, both privately and publicly.
- Breach of Duty of Loyalty and Breach of Duty of Care — Your directors and officers can be held personally responsible for negligent investment decisions and/or alleged failure to operate in honesty and good faith, whether these actions be direct or indirect. Employees and shareholders alike expect a company's portfolio to perform well and a lackluster performance can oftentimes be traced back to the lack of corporate governance and poor management. Your firm's officers must create and adhere to strict written fiduciary care guidelines so as to avoid shareholder derivative actions.