The volume of corporate litigation is an ongoing concern, in any economy.
In recent years, there has also been a global trend to hold individuals accountable for their actions. For stockholders, employees, customers and clients who feel they have been wronged, finding the guilty party and holding them accountable can often be accomplished by filing a lawsuit.
Given the increase in litigation, now is a good time to either buy Directors & Officers (D&O) liability insurance, or review existing coverage. You want to ensure that it meets the needs of your company and its directors and officers.
D&O insurance provides financial protection for directors and officers in the event that they’re sued as a result of actions they’ve taken for the organization. Procuring D&O insurance provides directors and officers with the assurance that they can perform their duties without incurring personal liability. However, it doesn’t provide members of the board and company executives with license to commit fraud or engage in reckless behavior.
Note: D&O insurance shouldn’t be confused with Errors & Omissions (E&O) insurance, which protects professionals and professional organizations from financial loss from negligence.
D&O insurance typically contains four areas of coverage:
1. A-side, which provides coverage to directors and officers for losses resulting from claims made against them.
2. B-side, which reimburses the company when it indemnifies directors and officers.
3. Securities coverage, which covers the company with respect to claims under securities laws.
4. Employment practices, which covers the company, directors, officers and employees for claims arising from employment-related litigation.
Recruiting Tool
D&O insurance not only helps insure a company against certain types of risk, but also serves as a recruitment and retention tool. Given the number of companies that are buying D&O insurance, not doing so may place your company at a competitive disadvantage when attempting to entice a director candidate to join the board.
Because directors can be found personally liable for a company’s wrongdoing, many directors won’t be comfortable placing their personal assets at risk. Providing them with a sense of security can help attract high-caliber candidates with the appropriate skills and experience.
Policy Terms
D&O deductibles, policy limits, and terms and conditions vary depending in part on the following specifics:
- Company size. The larger the business, the higher the probability that it will be sued. Plaintiffs look for “deep pockets” when choosing whether to file a lawsuit against a company. The more assets your company has, the more likely it will be the target of lawsuits and, thus, need D&O insurance.
- Type of business. The deductibles and other costs might be higher if your company is involved in a high-risk business sector, where lawsuits are routinely initiated by customers for product defects. The same is true in industries in which employees often sue for discrimination and harassment.
- Number and type of shareholders. The larger the shareholder population, the more likely it is that a member of your board will be sued. If your company is public, it will need to provide much more information to shareholders than a private company typically is required to do. With more information being in the public domain on the Internet, the chances of being sued have increased. Conversely, significant shareholders could request that a company buy a D&O policy because it’s in the company’s best interests to provide directors and officers with appropriate protection, which, in turn, allows them to carry out their responsibilities more freely and with less worry about financial exposure.
Best Practices for Existing Policies
If you already have a D&O policy in place, review it periodically to ensure that it meets the needs of the company. The following developments typically justify a review of D&O coverage:
- A change in the composition of the board.
- An increase in involuntary terminations as part of cost-cutting efforts.
- An merger or acquisition with a company that has been regularly involved in litigation.
- International expansion planned in the next 12 to 18 months.
- The introduction of an inherently risky new product or service.
- Increased regulation of your company’s business sector or a change in the political party in power within state or federal government.
- An increase in lawsuits filed against competitors.
Finally, before your company buys a policy, consider engaging a qualified, experience insurance consultant who can help you choose the best D&O policy for your needs. Ideally, this professional should have a detailed understanding of your operations in order to assess your company’s risk profile. D&O coverage can be complex, and this article only provides a general overview.
Copyright © 2023