It is easier to destroy than it is to construct. A lawsuit stemming from the actions or inactions of an organization’s board of directors and officers can erode a legacy that they have tirelessly built. Safeguarding these important yet vulnerable portfolios (and the establishment) is therefore of paramount importance.
This, therefore, raises the question of how to protect them. For starters, business insurance is non-negotiable, and you can click here to learn about some famous business lawsuits in history. However, choosing the right coverage is equally important, as the wrong choice can leave room for loopholes.
For directors and company officers, a D&O (Directors and Officers) insurance is a must have. Read on to learn about some risks that this policy covers.
What is D&O (Directors and Officers) Insurance?
This is a business insurance specifically designed to offer liability coverage to directors and management officers. It shields directors and officers from having their assets on the line as a result of a lawsuit for wrongful acts.
It greatly benefits the organization, beyond shielding these corporate portfolio holders. For example, the organization may receive reimbursement or significant compensation if it has paid for wrongful acts of D&O-insured individuals. For the record, the term wrongful act is broad, as it includes acts of:
- Negligence
- Breach of Duty
- Omission
- Misleading Statement
- Misstatement
- Error
The common thing here is that these acts are committed in a professional capacity, thereby exposing the business, besides the adverse effects of the directors or officers in question. This coverage makes the insurer face the consequences of an unfavorable action by corporate management, to a certain extent.
However, you need a thorough understanding of the policies. This is especially true because such plans can have limitations. For example, many of them would not cover:
- Criminal Behavior
- Illegally Obtained Profit for Personal Reasons
- Deliberately Committed Fraudulent Acts
Two key points stand out here. First, it covers unintentional wrongful acts. Secondly, it protects both those in corporate management roles and the corporate management structure as a whole.
It falls under Management Liability Insurance, which is a sub-category of Business Insurance. Management Liability Insurance differs from General Liability insurance, and for a broader understanding of what it is about, you can watch: https://www.youtube.com/watch?v=QHA5U13qaGg.
Protecting Leadership: 7 Critical Risks D&O Insurance Addresses
A great position demands a greater sense of responsibility. This is very true because great positions can lead to greater exposure, among other things. Speaking of exposure, some of the risks D&O insurance addresses are discussed below:
1. Security Claims or Shareholders' Actions
Shareholders have an interest in businesses, and the directors and officers of these businesses can be at the receiving end, especially during certain periods. A good and common example is when there is a stock price fall. Stakeholders have alleged mismanagement, fiduciary duty breaches, and financial misstatements in several instances during such times.
Some stakeholders make these claims even without substantial proof. Well, liability concerns arise even when stakeholders do not/cannot substantiate these claims. This is because things like legal fees have to be sorted. Of course, it costs a lot more if things result in a settlement.
D&O insurance offers coverage for these. You can visit The Baldwin Group to find out specifics on how this plays out. It directly benefits the directors and officers in question and the company at large.
2. EPL (Employment Practices Liability) Claims
Whether as a director or top-ranking officer, becoming a top-level executive means you are not just dealing (directly or indirectly) with clients. You also deal with employees, and several lawsuits can arise as a result. One can even face these lawsuits from past and prospective employees for claims including:
- Discrimination
- Unfair Hiring
- Harassment
- Wrongful Termination
Note that EPL (Employment Practices Liability) insurance exists, and it is designed to take care of the aforementioned. However, it could be part of D&O coverage policies or could complement EPL coverage. Thoroughly understanding the policy is important for reasons such as this.
Either way, it saves these top-level executives from costly human resource-related claims. This presents a great reason to have D&O insurance, considering how likely this can happen, especially as a business grows.
3. Regulatory Investigations and Enforcement Actions
Businesses can face varying degrees of scrutiny by government-instituted regulators that perform oversight roles. Even when the establishment meets required standards, regulatory scrutiny has cost implications for businesses, and these expenses will not be taken care of by these institutions.
This is why companies must get the required support. Having D&O coverage up and running is a great way to go about this. It also proves useful during enforcement actions by these regulators.
By the way, some of these regulators are industry-specific, while some are general. The OSHA (Occupational Safety and Health Administration), for instance, is a good example of a general oversight body.
The FDA, on the other hand, is a good example of an industry-specific oversight body, as it regulates the activities of businesses in the pharmaceutical and food industries. You can check here if you would like to find out other things the FDA is responsible for.
4. Creditor Claims
People usually point fingers at the directors and top management executives when a financial crisis occurs in an organization. This is especially true when it is as serious as insolvency and/or bankruptcy.
Claims of financial mismanagement and fiduciary duty breaches are some of the things that these portfolio holders may have to deal with during such times. A D&O plan provides a good way to protect them.
In more specific terms, it protects the personal assets of these portfolio holders. One major reason for considering this plan is that things can get so complicated that the company would be unable to indemnify these top-ranking officials.
5. Breach of Fiduciary Duty
Poor oversight and acting in self-interest when carrying out deals are some common claims against directors and top-level officials. They all fall under breach of fiduciary duty, which is one of the major risks that D&O insurance seeks to cover.
It offers these portfolio holders one of the best ways to protect themselves from the consequences of unintentional oversight and poor judgment. At the very least, it reduces the damage they have to deal with.
6. M&A (Mergers and Acquisitions) Litigation
While M&A deals can appear as the way forward for certain businesses, several issues often arise. Without adequate protection from liability coverage like D&O insurance, these issues can significantly cost directors and top-ranking officials.
This could include claims of unfair valuations, conflict of interest, and misrepresentation, for instance. D&O insurance is necessary for the legal costs of defending these portfolio holders or even settling aggrieved parties.
7. Data Breach and Cyber Attacks Related Claims
Cyber attacks have affected many businesses, with some failing to recover. For more on this subject, you can visit: https://cybersecurityventures.com/.
This has therefore necessitated an improved focus on cybersecurity across various industries. In simpler terms, there are cybersecurity expectations from directors and pertinent officials.
In some cases, the failure or alleged failure to ensure cybersecurity can lead to claims against directors and pertinent top officials. Affected customers and/or regulatory bodies commonly file such claims, but third parties and even employees could also bring them.
Against this backdrop, some D&O policies are there to protect such directors and officials. You see this especially with modern policies, as D&O insurance existed before the rise in cyber attacks.
Wrap Up
D&O insurance addresses several common risks, offering several benefits for the corporate world and especially directors and management executives. The benefits in question include:
- Personal Asset Protection – This means that these officials would not have to worry about losing their assets – savings, homes, or personal wealth
- Coverage of Defense Cost – This is great, considering how costly and prolonged it can be
- Talent Attraction – Industries struggling with talent acquisition and retention can win over prospects with such a liability plan
The list continues, as several other benefits are available. However, you must also choose the right insurer, and one way to do this is to compare insurers and thoroughly evaluate their policies. So, ensure you do this.
