The volume of corporate litigation is an ongoing concern.
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 purchase 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 are sued as a result of actions they have 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 does not provide members of the board and company executives with license to commit fraud or engage in reckless behavior.
Note: D&O insurance should not to be confused with Errors & Omissions insurance, or E&O insurance, which protects professionals and professional organizations from financial loss from negligence.
D&O insurance typically contains four areas of coverage:
- A-side, which provides coverage to directors and officers for losses resulting from claims made against them.
- B-side, which reimburses the company when it indemnifies directors and officers.
- Securities coverage, which covers the company with respect to claims under securities laws.
- Employment practices, which covers the company, directors, officers and employees for claims arising from employment-related litigation.
D&O insurance not only helps insure a company against certain types of risk, it can also serve as a recruitment and retention tool. Given the number of companies that are purchasing 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. Since 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 you need on your company’s board.
D&O deductibles, policy limits and terms and conditions vary depending in part on the following specifics:
- Company size. The larger the company, the higher the probability that it may be sued. Plaintiffs look for “deep pockets” when considering which company to sue. The more assets your company has, the more likely it will be the target of lawsuits.
- Type of business. The deductibles and other costs may 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 in the public domain, the chances of being sued increase. Conversely, significant shareholders may actually request that a company purchase a D&O policy since it is in the company’s best interests to provide directors with appropriate protection, which in turn, allows them to carry out their responsibilities.
Review Existing Policy
Periodically, it is important to conduct a review of your company’s D&O policy to ensure that it meets the needs of the company. The following developments may justify a review of existing D&O policies:
- A change in the composition of the board.
- An increase in involuntary terminations as part of cost cutting efforts.
- An acquisition or merger with a company that has been regularly involved in litigation.
- International expansion planned in the next 12 to 18 months.
- The introduction of a new product or service that is inherently risky.
- 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 the lawsuits filed against competitors.
Finally, before your company purchases a policy, consider engaging a professional with previous experience to help 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.