As a manager, director or officer of an organization, you’ve seen headlines in the news citing civil or criminal legal actions being brought for alleged wrongful acts. Such events have serious financial and reputational consequences for both the individual and the company. The complex nature of the decisions a manager must navigate on a daily basis can increase the risk for the organization. So, how can insurance help? The simple recommendation is to acquire Directors and Officers Liability Insurance commonly referred to as “D&O.”
Generally speaking, D&O insurance covers the directors and officers from liability claims made against them while they are sitting on a board of directors or hold a position as an officer for acts, errors, omissions, misstatements and misleading statements. These policies are not only designed for public companies but can be used for privately-held firms, not-for-profit organizations, and educational institutions. It is often perceived as “management errors and omissions liability insurance.”
What types of events could lead to D&O claims? The nature of each organization will greatly influence what types of claims could be possible. Arguably, every company is exposed to a potential D&O claim from shareholders, creditors, customers, regulators, and competitors. For public companies, claims are usually tied to shareholders; whereas, private companies tend to have claims arising from deceptive business practices or antitrust filings. Nonprofits, on the other hand, see claims focusing on employment practices. Other risk scenarios could be reporting errors, inaccurate or inadequate disclosures, decisions exceeding the authority granted to a company officer, failure to comply with regulations or laws, corporate manslaughter, insolvencies, mergers, and acquisitions, as well as divestitures.
For example, a homeowners association is hit with a severe hailstorm causing significant property damage. Unfortunately, the board of directors of a homeowners association (HOA) didn’t take the time to adequately review their annual property insurance policy to see a 2% wind hail deductible rather than a flat rate deductible. With the property values totaling $10 million, the deductible is $200,000 rather than $50,000. In the event that the outstanding amount assessed is more than the HOA’s available monies, the homeowners would be the responsibility of paying the remainder. Understandably, the homeowners could decide to file a lawsuit against the board of directors for mismanagement of their HOA’s insurance. The claim would be filed under the HOA’s D&O policy. The cost for defending such claims could be financially devastating to an HOA or other organization without assistance from insurance.
If you are a manager, director or officer, the company will typically purchase the D&O policy along with their other business insurance such as general liability and workers compensation. These policies are not a “one size fits all” item as no two organizations have exposure to the same risks. Taking the time to discuss how D&O coverage might protect your business is essential, particularly regarding any potential gaps in coverage. Common exclusions to be mindful of are criminal acts, wrongful acts, insured versus insured and carve-outs. Illegal acts are not going to be covered with D&O liability insurance, but rather wrongful acts as delineated in the specific policy.
The “devil is in the details” with Directors and Officers Liability Insurance, so be sure to tap your insurance broker to explain the specifics of forms and exclusion to every policy. It’s worth the organization’s time and effort to get this policy purchased correctly.
If you would like to talk to someone about if D&O insurance would be a good fit for you, fill out the short form below.