The range of exposures facing directors and officers, and the resulting claims and class-action lawsuits, have increased significantly in recent years.
- Claims made against directors and officers are arising from a variety of scenarios, including product problems, man-made disasters, environmental disasters, corruption, and cyber attacks.
- Current issues that have led to claims against directors and officers include the #MeToo movement, privacy violations, and the use of social media.
- Lawsuits driven by shareholder opposition have increased significantly. The likelihood that a public company will be sued in a securities class action has increased from 3.5% in 2014 to 8.5% in 2018.
These claims are not limited to large, publicly-owned organizations. Businesses and organizations of any size have risk. This includes privately-held firms, for-profit businesses, non-profit organizations, and educational institutions.
What is Directors and Officers Insurance?
Directors and officers (D&O) insurance is designed to protect board members, directors, officers, and managers from allegations of wrongdoing brought against them in regards to their role in the governance of the organization. It is liability insurance that provides personal financial protection for company officers and directors as individuals.
Types of Claims Covered by D&O Insurance
D&O insurance covers claims that arise against directors and officers from actions they have made that resulted in negative financial consequences for the organization, including:
- Actual or alleged wrongful acts
In addition, D&O insurance can cover claims for listed stock companies that arise from a wrongful act in connection with the trading of their securities.
These claims are not limited to large, publicly-owned organizations. Businesses and organizations of any size have risk.
Most policies are written to cover claims on a “claims-made basis,” meaning claims that are made while the policy is in effect. Sometimes a policy will have an extended reporting period where claims can be reported after the policy has expired. A D&O policy may also cover claims for wrongful acts that took place before the policy’s inception (retroactive period).
Coverage for Defense Costs
A D&O insurance policy will provide coverage for defense costs and financial losses that result from claims against directors and officers. Some D&O policies include defense expenses within the limit of liability. This means the cost of defense expenses will be taken out of the total amount of insurance available to pay the claim.
Some types of claims don’t involve a significant defense expense, while other types of claims have the potential of using most, if not all, of the liability limits. In some cases, the policy will cover the insured company if the company has paid the claim of a third party on behalf of its managers.
What is Not Covered by D&O Insurance?
A D&O policy will not cover claims that arise from the following:
- Bodily injury
- Property damage
- Acting for personal profit
- Breach of contract
- Dishonest acts
- Intentional acts of noncompliance
- Claims covered by other insurance
- Claims made under a previous policy
Corporate by-laws and/or indemnification agreements do not provide complete protection against D&O risk, so it is important to include D&O coverage in your insurance policy.
Who is Protected by D&O Insurance?
A D&O insurance policy provides coverage for directors, officers, managers, committee members, employees, and sometimes volunteers who are acting under the direction of the organization.
Exposures Faced by Directors and Officers
There are a variety of risk exposures that directors and officers face. In addition, they are under increased scrutiny due to the economy, stock market, and an enhanced level of governmental regulation.
Some of the exposures directors and officers may face include:
- Securities litigation
- Regulatory actions
- Allegations of misrepresentation
- Employment practices
- Human resources issues
- Shareholder actions
- Reporting errors
- Inaccurate or inadequate disclosure
- Failure to comply with regulations or laws
- Making decisions that exceed the authority granted to the officer
- Other breaches of fiduciary duties
Another area of growing risk to directors and officers is employee piracy. This can occur when a key employee has left the company to either join a competing organization or start their own company. The previous employer may end up suing the firm the past employee has joined as well as the directors and officers of that firm for theft of customers, intellectual property, or other business information.
Current issues that have led to claims against directors and officers include the #MeToo movement, privacy violations, and the use of social media.
Who Makes Claims Against Directors and Officers?
Claims against directors and officers can come from internal or external sources. Internal liability includes claims made by parties within the company, including the company itself, subsidiaries of the company, bankruptcy/insolvency trustees, etc.
External liability includes claims made by employees, competitors, suppliers, stockholders, creditors, social security, and tax authorities. Customers are behind a large majority of lawsuits against directors and officers.
Not All Policies Are Created Equal
There is no standardization of policy forms for D&O coverage, so it is important to review your risks with your insurance advisor. Policies vary in terms, conditions, and scope of coverage, and your insurance agent can help you make an informed decision in choosing a policy that is tailored to the specific risks you face, both personally and professionally.
A D&O policy doesn’t protect against everything; however, a properly tailored policy can significantly reduce the risk your directors and officers face.
Does your organization need directors and officers liability insurance? Contact your Leavitt Group insurance advisor to learn more.