If your company is sued for a breach of fiduciary duties, mismanagement of operations or wrongful interference with a contract, do you have the proper coverage to protect you?
What if you are sued for failure to deliver on a contract, for disclosure of materially false or misleading information, an unfair trade practice, self-dealing and conflicts of interest or a consumer protection violation, and a violation of state and federal laws? Are you protected from a lawsuit? If you are not carrying Directors & Officers, you are leaving those individuals and your company at risk, says Todd Winter, executive vice president at SeibertKeck.
“Directors & Officers coverage is designed to protect individual directors and officers as long as they act in good faith, use reasonable care and act within the scope of their duties,” Winter says. “It’s like an errors and omissions coverage made for the directors and officers of the company. It protects the financial assets of the company as well.”
Smart Business spoke with Winter about how Directors & Officers liability insurance can protect you and your company in the event of a lawsuit.
What kinds of companies should consider Directors & Officers liability insurance?
Any company has this exposure and the risk is universal. But many private companies do not believe they need D&O. Most think publicly traded companies have the greatest risk, as they must adhere to complicated and ever-changing securities laws, and have a large number of shareholders. Claims can arise from investors, shareholders, customers or clients, government regulators, creditors and lenders and even from competitors.
Privately held companies and their directors and officers are not immune to lawsuits. The most likely plaintiff is a customer, followed by a government agency, vendor and partner or shareholder. Directors and officers of privately held corporations owe the same duties to shareholders as their counterparts at publicly held corporations. Private companies often are incubators for cutting edge business models and products, or for creative investment strategies. A lawsuit can result in significant financial loss to the company in the form of defense expenses, judgments and penalties, not to mention the personal financial loss to the directors and officers.
Even non-profit boards are at risk of being sued. Coverage is of particular importance to these organizations because they rely on volunteers’ boards that make important decisions for the organization. Lawsuits can have a devastating impact on the operating budget and can even put the organization out of business.
A couple of simple questions may help to guide you by pointing out areas where your company may face possible exposure to loss:
- Do your company’s officers have occasional disagreements with customers, creditors, competitors or regulators?
- Has your company been involved in the purchase or sale of any debt or equity securities within the past three years?
- Might at least one former, current, or future shareholder of your company be dissatisfied with the company’s performance or management decisions?
- Is your company contemplating an IPO within the next three years?
- Do directors and officers of your company have close personal relationships with or strong allegiance to the controlling shareholder(s)?
- Are your company’s directors and senior officers unfamiliar with your company’s legal obligations or their own personal legal duties and responsibilities as managers?
Why don’t more businesses have this coverage?
Business owners decide not to purchase for many reasons, but mostly because they do not feel they are at risk. They understand the possibility of a fire, or a tornado, an auto accident, or a slip and fall on their premises and are willing to buy a policy to cover those risks. A lot of times, owners don’t understand the real need, and elect not to purchase. Another reason is due to the cost, which you may find inexpensive, depending on the size of your organization.
What are some scenarios in which companies can benefit from Directors & Officers liability coverage?
If your company is growing and expanding into other areas, it may not realize the regulations that come with the move. Or if there is an activity of mergers and acquisitions taking place and someone is giving out protected information.
Here are a few examples: a VP of a manufacturing plant determined that a new product line presented tremendous sales potential. Instead of presenting the company with the opportunity, he shared it with his brother, who formed a new company to manufacture it. Shareholders sued, alleging that he wrongfully took advantage of an opportunity that belonged to the company.
In another situation, a company recruited a top sales executive employed by a competing company. The competitor sued the company, alleging the company had interfered with its contractual relationship with its employee. Defense expenses and compensation awarded nearly $900,000.
What else does Directors & Officers insurance cover?
Directors & Officers liability coverage pays for legal defense and if purchased on a duty to defend basis, the insurer will supply expert counsel. Also, the majority of these policies cover past, present and future actions of elected and appointed directors and officers. Having D&O coverage can help an organization attract and retain qualified directors and officers. Decisions are made every day, and you will want to protect those decisions as one could possibly end up in a lawsuit. If you don’t have Directors & Officers liability insurance coverage, your risk could be tremendous.
Todd Winter is executive vice president at SeibertKeck. Reach him at (330) 865-6572 or firstname.lastname@example.org.
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