Buy Directors And Officers Liability Insurance

Directors and officers liability insurance (D&,p;O) is a type of insurance that provides financial protection for the directors and officers of a company against claims of wrongful acts, errors, and omissions. This includes allegations of mismanagement, fraud, or other financial improprieties.

The coverage can also include defense costs, judgments, and settlements that may be incurred in defending such claims. This insurance is designed to protect the personal assets of directors and officers and to ensure that they can continue to lead the company without the fear of personal financial ruin.

The average price of a standard $1,000,000 Directors And Officers Liability Insurance policy for small businesses ranges from $87 to $119 per month based on location, financials, industry, payroll, sales and experience.

This directors and officers liability insurance, often referred to as D&O insurance, this coverage protects officers and directors against legal claims that are made against them while serving as officers or on the board of directors. This type of coverage can be bound for professionals serving in this capacity for privately held firms, non-profit organizations and educational institutions. It is not unlike the malpractice insurance that lawyers, dentists and doctors maintain or the errors and omissions insurance that licensed professionals use as part of their comprehensive commercial insurance plans.

This is most true in the sense that D&O insurance will cover damages and legal expenses that are the result of managerial actions or decisions resulting in financial loss. Directors and officers are held legally and financially responsible for the decisions that they make on behalf of or affecting shareholders, client companies, creditors and investors. Claims of this nature are being seen in businesses with increasing frequency.

Unfortunately, those who serve as officers and directors can be held personally liable for the resulting damages if this coverage isn't in place. It is also important to note that both non-profit and for-profit companies will need to bind this directors and officers liability insurance to protect directors and officers if they hope to attract qualified board members and executives and retain the services of these individuals.

It is a common and costly myth that board members are covered by their home insurance policies. While their may exist certain protections for these individuals within their homeowners' insurance plan, these provisions are not guaranteed to cover all costs, nor are they guaranteed to be relevant all of the time.

In short, people should not count on these policies to cover them for any association board service, even if they happen to be compensated for filling these rolls. The protections that do exist under certain homeowners insurance plans are rarely going to prove sufficient for cover all legal expenses and other costs from the average liability case.

It must meet the definition of a "Wrongful Act."

It is Directors And Officers protection for companies when they are named in litigation along with their directors or officers.

Directors And Officers Liability (Side A Coverage) - pays on behalf of any directors or officers for their liability arising out of wrongful acts. Company Reimbursement or Company Indemnification (Side B Coverage) - reimburses the insured company for payment made to its directors and officers. The payments must involve the director or officer's expenses incurred by reason of claims made against them for wrongful acts, and to which they are entitled by the company's by-laws.

Most Directors And Officers Liability policies issued are written under a single policy cover, but with two separate coverages: Directors And Officers Liability (Side A Coverage) and Company Reimbursement or Company Indemnification (Side B Coverage).

There are two methods of describing the covered directors and officers under the Directors And Officers Liability policy. Some underwriters prefer to have the insured company list the titles or positions of directors and officers covered in the applicable declarations page. This permits the underwriters to review the positions insured. Several underwriters have revised their contracts to add an item on the declarations page which reads: "The policy does not provide coverage for the following positions." When such a provision is used, all directors and officers are covered except for any that are specifically excluded by the insured corporation.

The Directors And Officers Liability policy does not contain an express duty to defend the insureds. There is no obligation by the insurer to pay costs of defense on an ongoing basis. The insureds must pay defense costs until the ultimate resolution of the claim to determine whether coverage exists and the insurer is obligated to pay. In practice, insurers typically cover ongoing defense costs, because some insureds could jeopardize the quality of defense if they couldn't afford adequate defense on their own.

As a result of a research company survey completed by a large sample of businesses, it was found that their Directors And Officers coverage-related losses originated from the following chief sources:

Direct and Derivative Shareholder/Investor Suits

• Mergers and acquisition
• Inadequate/inaccurate disclosure
• Takeover threats or bids
• Challenge to takeover defense measure
• Divestiture or spin-off
• Financial performance/bankruptcy
• Dishonesty/fraud

Employees

• Wrongful termination
• Discrimination
• Breach of employment contract (not termination)
• Pension, welfare or other employee benefit disputes

Government and Regulatory Agencies

• Dishonesty
• Fraud
• Violations of: Civil Rights, Wall Street Reform and Consumer Protection Act(Dodd-Frank) Violations and Sarbanes-Oxley Act

Fiduciary/ERISA

Following are 10 good reasons for private companies to purchase directors & officers liability coverage (in no particular order):

1. Employee claims: EPL claims made against private companies are frequent and severe.
2. Shareholder claims: Claims by minority shareholders are a significant threat. Such shareholders are often employees with day-to-day knowledge of the company's activities and are better able to uncover director/officer malfeasance than would the typical shareholder of a large, publicly traded corporation whose only connection to the business is owning shares of stock in the organization. Thus, because they have better information, the shareholders of small, privately held companies are more likely to make claim allegations "stick."
3. Claims by miscellaneous entities: Claims by non-shareholders, including competitors, government agencies and regulators, creditors, customers, and vendors, are commonly made against private companies.
4. Fiduciary claims: Private companies that offer benefit plans to their employees are subject to the ERISA of 1974 and thus have an exposure to claims alleging breach of the responsibilities mandated by this law.
5. Director/officer asset protection: Yet another reason for private companies to buy D&O insurance is that such coverage serves to protect the personal assets of officers and directors in the event they are sued in conjunction with their service. While corporate bylaws and state laws typically require companies to indemnify directors, indemnification is not always provided. For example, if the company is insolvent, it may be financially unable to make such an indemnification. Also, no indemnification is provided when derivative suits are filed.
6. Company protection and survival: Most small businesses do not have the financial wherewithal to fund major litigation and/or cover large settlements and judgments out of their operating capital. Having D&O coverage in place may be the difference between liquidation and survival for many privately held organizations.
7. Ability to recruit managerial/board talent: A company that does not purchase D&O coverage may have difficulty recruiting directors. Directors fear lawsuits and expect the firm to protect them against potential litigation.
8. When/if the company goes public: Once a firm becomes a public company, the threat of lawsuits rises substantially, especially the threat of securities class action claims. As a result, virtually all public companies buy D&O insurance. If a firm purchased D&O insurance coverage while it was privately held, the terms and conditions of its public company D&O policy form-as well as its premium-will be more favorable, compared to one that is buying such a policy for the first time. This is because the company's history as a D&O buyer while still privately held establishes a "track record" with an underwriter. Moreover, such a company will have less difficulty buying prior acts coverage (i.e., coverage applying to wrongful acts before the company went public) compared with one seeking D&O insurance for the first time.
9. Access to credit: Having D&O coverage will make it easier for the firm to obtain credit. If the company defaults on a loan or, worse, declares bankruptcy, banks and creditors will want a source of funds available to recoup their losses from the loan default. And even if such a default or bankruptcy never happens, merely providing evidence of D&O coverage indicates to a loan officer that the private company is soundly managed.
10. Enhanced coverage breadth: Compared to D&O policies written to cover publicly held companies, private company D&O policies offer demonstrably broader coverage but at a much lower premium. Private companies should take advantage of this opportunity, as it will not be available once the firm goes public.

Privately Held Companies Not Buying D&O Insurance

When a private company has not purchased a D&O policy and is sued, it often lacks a source of reimbursement for defense and settlement costs. It also has no ready access to the expertise and experience an insurer can provide to assist it in defending the claim.

Private companies are not required to report or publish their financial statements. Nevertheless, they have significant exposures to claims, including securities claims.

Also, privately held companies are frequently sued by competitors, government agencies, regulators, and employees-in addition to stockholders-based on allegations that involve areas other than the organization's securities.

Not Naming High Level Non-officers As Insureds

In some organizations, such as hospitals, individuals in officer positions do not have titles like "vice president" or "secretary." A person who is, in effect, the chief executive officer of a hospital may have the title "chief administrator."

Under such circumstances, to avoid an unintended gap in coverage, it may be worthwhile to specifically list, in the policy declarations, the person or persons for whom coverage is intended to apply.

No D&O Coverage For Executives Serving On Outside Boards

It is not unusual for a corporation's directors and officers to also serve on the boards of other organizations. Such outside service generates exposures to liability.

A company's D&O policy can include coverage for the corporation's directors and officers who also serve on the board of an outside nonprofit organization.

Not Buying D&O Coverage For A Newly Acquired Subsidiary's Prior Acts

Merger and acquisition activity often gives rise to lawsuits by stockholders alleging that the directors and officers of the buyer and/or the acquired company somehow failed in performing the duties owed to their respective corporations.

Allegations in lawsuits filed against the directors and officers of the buyer generally fall into one of three categories:

1. They pursued their own interests (either financially or in terms of personal ambition) over those of shareholders in making or attempting the acquisition.
2. They paid too much for the acquisition.
3. They did not properly evaluate the impact of the acquisition on the firm's financial performance.

Suits against directors and officers of the acquired company are of particular concern because the company's D&O liability insurance policy is automatically canceled on the effective date of the acquisition. The now-canceled policy will not cover acts committed prior to the acquisition (but for which claims are made after the acquisition date).

This presents a problem since mergers and acquisitions almost always increase the likelihood of a lawsuit against the acquired company's board of directors.

Failure To Remove Or Amend The Failure To Maintain Insurance Exclusion In A D&O Policy

Many D&O policies exclude coverage for claims alleging loss due to the failure of directors and officer to maintain insurance coverage. Because this exclusion can easily lead to denied claims, the exclusion should be removed if possible.

Directors and Officers Liability Insurance (D&O Insurance) provides coverage for claims against directors and officers of a company for alleged wrongful acts in their capacity as leaders of the organization. Here are some examples of D&O Insurance claims:

Shareholder lawsuits: If a company's financial performance declines, shareholders may sue the board of directors for breach of fiduciary duty or mismanagement of the company's finances. D&O Insurance can help pay for legal expenses and damages awarded in such lawsuits.

Employment discrimination: Directors and officers can be sued for discrimination or harassment of employees. D&O Insurance can help pay for the costs of defending against such claims and any damages awarded.

Securities lawsuits: If a company's stock price declines significantly, shareholders may sue the board of directors for misrepresenting the company's financial position. D&O Insurance can help pay for the costs of defending against such claims and any damages awarded.

Regulatory investigations: If a company is investigated by a regulatory agency, such as the Securities and Exchange Commission (SEC), directors and officers can be held liable for any violations that occurred. D&O Insurance can help pay for the costs of defending against such investigations and any fines or penalties imposed.

Intellectual property disputes: If a company is accused of infringing on the intellectual property rights of another company, directors and officers can be sued for damages. D&O Insurance can help pay for the costs of defending against such claims and any damages awarded.