May 17, 2011
Directors’ & Officers’ Liability
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.
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.
Directors’ & Officers’ Liability — The Protection
D&O policies vary greatly from insurer to insurer and are oftentimes designed for particular types of risks. The most common types of policies are those designed for non-profit and for-profit organizations and publicly traded and privately held companies. Some important components to consider when purchasing coverage are:
- Entity Coverage — Provides direct protection for the firm itself. Many suits name individuals as well as the organization and Entity coverage ensures coverage for liability incurred by the organization.
- Duty to Defend Provision — Requires the insurer to pay claim expenses even if the allegations are baseless, rather than providing reimbursement after such a claim is closed.
- Defense Costs Insured Outside the Limit of Liability — An essential provision! Many plaintiffs seek to protect their own long-term interests and investments in a company by seeking to impose new corporate management practices rather than monetary damages. In addition, a class action suit can easily and quickly exhaust a policy’s limit of liability with pure defense costs.
- Outside Entity Coverage — Extends coverage to individuals serving on other boards as part of their job function.
- Broadened Definition of An Insured — Expands coverage to include your employees, volunteers, trustees, committee members, family members and spouses.
- Libel, Slander, Copyright and Trademark Infringements — Extends personal injury coverage for suits alleging damages related to publishing liability.
- Severability Clause — Assures protection for innocent parties within the application process. The provision provides for knowledge of material or false statements given within the application as possessed by one insured will not be imputed to another insured.