Directors & Officers Insurance Explained
In today’s business climate of corporate transparency and accountability, an organization’s officers and directors face a myriad of employment-related exposures. Regulatory mandates and shareholder activism mean directors and officers are more frequently at risk, translating to rising directors & officers’ insurance claims and escalating settlement costs.
In the wake of unprecedented corporate scandals in recent years, clearly the trend of corporate accountability and transparency applies to large corporations. But privately held companies, including non-profits, are not exempt from litigation arising out of the management decisions of their boards. They too are at risk.
Regardless of your company’s size, the legal cost to defend a director or officer is substantial, as are the potential penalties that can be personally incurred. Due to the personal liability risk—which is not covered under a personal insurance policy—protecting boardroom talent can be a challenge. To help ensure both your officers’ and company’s well-being, directors & officers insurance (D&O) policy should be part of a comprehensive risk management strategy.
Directors & Officers Insurance Fills The Coverage Gap
Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a directors & officers insurance policy specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.
For example, an employee of a small, Canadian private business convinced the board of directors that he was qualified to step into the role of president of the company and he was appointed. Under his leadership, the company’s financial position was substantially weakened. On behalf of the company, a shareholder sued the board of directors alleging that it used poor judgment and did not act in the best interest of the company when it appointed the new president. The case eventually settled for $1,500,000 million-plus legal fees of $300,000 resulted in a $1,800,000 loss paid by the insurance company.
A Directors & Officers Insurance Policy Typically:
- Provides defence costs and indemnity coverage to the entity listed on the policy declarations and:
- Coverage for past, present and future directors and officers of the company;
- Reimbursement to the organization for a contractual obligation to indemnify directors and officers that serve on the board
Indemnification provisions are typically included in the charter/bylaws of a corporation. While an important risk component, small to midsize privately held companies or non-profit organizations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow. A directors & officers insurance policy can provide an extra blanket of security in the event of a covered loss.