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DIRECTORS & OFFICERS Liability INSURANCE
Company directors and officers have a moral and legal obligation to do what they feel is in the best interest of the company. Unfortunately, lawsuits and damage claims have risen tremendously in recent years. Some of these suits are aimed directly at the corporate officers or directors while others aim at the company itself.
Directors and officers insurance also known as D&O, is financial protection against management specific claims. It is similar to Errors and Omissions insurance (E&O), but covers executive and corporate performance instead of professional service performance.
Directors and Officers insurance protects corporate executives when mis-management claims are made against them from stockholders, employees, and outside parties.Examples: A company director or officer could have the following types of suits levied against them:
- Stockholders may sue the company and its executives for poor financial performance.
- Stockholders may sue for dishonesty or fraud.
- Stockholders may sue because the company is being taken over by a competitor.
- The SEC may sue the company for potential financial fraud or mistakes on the company's disclosure and earnings statements.
- Employees may sue for wrongful termination.
- Employees may sue for discrimination.
- Employees may sue for a breach of contract.
- Customers may sue for fraud or dishonesty in advertising.
- Third party groups, such as public activists or government bodies, may sue for action or inaction by the company.
When individuals, other corporations, competitors, Federal regulators, stockholders and others sue a company, they also often sue the primary directors and officers. It is estimated that 80 percent of liability suits aimed at a specific company director will also name the company itself in the suit along with other executives.
Directors and officers insurance has been around for over 50 years but there is a wide variation in coverage levels. When reviewing your D&O policy options and planning personalized coverage for your company, it is important to look at all options available. Two coverage plans can provide very different levels of coverage despite being similar in price.
Go through the fine points with your commercial insurance agent and make sure you are getting all of the different levels of protection you need on your D&O policy.
Make sure to also review what is specifically excluded in the policy. For example, many D&O policies will not provide coverage for specific fraud and criminal acts. The policy may not cover lawsuits involving property damage, bodily injury, or pollution discharge.
Your company cannot grow without this critical commercial insurance coverage. In today's world of increased litigation, most investors and venture capitalists will not work with your company until you are protected by a solid D&O insurance policy. You will also find that you are unable to attract skilled executives to the top positions without D&O coverage, because the directors and officers can be held personally liable for acts made by the company.