Whether you are volunteering for a small not-for-profit organization or have been appointed to the board of one of the largest companies, you need to know about potential personal liability. You also need to know how to obtain protection from potential litigation in those positions.
“Whenever you are involved in making decisions that affect other people or organizations, it is important to recognize that those decisions expose you to litigation,” says James M. Fasone, division senior vice president at Arthur J. Gallagher Risk Management Services Inc. “Directors and officers (D&O) insurance is the best form of protection, after due diligence, against claims of omission or alleged misconduct.”
Why do the majority of organizations of any size buy D&O insurance?
Most buyers of this product are looking to protect their personal liability arising from their fiduciary duty to third parties as directors and officers. While most corporations allow for the indemnification of directors and officers, both the corporation and directors and officers appreciate the added security of insurance protection against personal litigation for any alleged mismanagement.
Many buyers merely look at the economics involved and the potential exposure to high-net-worth independent directors, and migrate to the lowest cost alternative. As this is a very personal protection, more savvy buyers look to benchmarking studies, peer review and complex limit analysis tools to support this important decision.
There are some limited publications available that provide generic data sets that can provide some guidelines. Many buyers rely on various third parties, including insurance brokerage specialists, that have expertise in the product line.
Who are some of the common litigants against directors and officers?
Though employees bring the majority of claims against private and not-for-profit companies, shareholders bring the most claims against publicly traded companies. Litigation can be brought from numerous other sources, including debt holders, customers, suppliers, competitors and regulatory agencies, to name a few.
What are the current market conditions for purchasing D&O insurance?
This is an excellent time to be a buyer for D&O liability insurance. Pricing has significantly softened the past few years. Increased capacity, more sophisticated underwriting tools and a recent decreasing trend in claims have all lead to more aggressive pricing for buyers.
The average cost of defense of litigation is about $600,000. While settlement amounts vary, employment-related claims can exceed $2 million and securities litigation settlements average over $18 million.
For privately held and not-for-profit organizations, the policy is purposely written in a broad fashion. Typically, directors and officers, employees, temporary staff, and the organization itself are protected under the policy. The policy can be negotiated to protect independent contractors, volunteers and even certain third parties in some instances.
Is any particular industry sector more at risk for D&O liability than others?
While underwriters look to assess the risk of each individual company on its own merits, some industry sectors have a higher risk profile and are prone to more litigation. Among these sectors are technology companies, energy-related corporations and those involved with the delivery of health care services. These particular sectors can have highly volatile financial results due to changing technology, shifting competitive landscape and unmanageable regulatory influence.
Does an initial public offering or the raising of public debt increase the potential liability of directors and officers?
Any public filing with the Securities and Exchange Commission, whether to raise debt or equity, significantly increases the potential for personal liability of those involved. The SEC Acts 33 and 34 have very specific provisions regarding the types of representations that can be made about the sale of securities to the general public. Any and all disclosures made to the public are often sited in misrepresentation cases to support securities litigation when a company fails to meet its financial projections. Securities litigation represents the single largest cost of claims to the insurance companies, making the cost of premiums for public companies significantly higher than their privately held peers. <<
JAMES M. FASONE, ARM RPLU, is division senior vice president at Arthur J. Gallagher Risk Management Services Inc. Reach him at (303) 889-2516 or at Jim_fasone@ajg.com.