Action brought against directors and officers of a company, whether based upon actual or alleged wrongful acts, can result in a Directors & Officers (D&O) Liability claim. This can arise from executing daily tasks or management functions. Directors and officers of a company have three main duties — loyalty, obedience and diligence — and every decision they make can fall under scrutiny. Any actual or perceived breach of responsibility can lead individual directors and officers, as well as your business, into a lawsuit. Potential claimants are vendors, customers, creditors, competitors and employees. Examples of alleged wrongful acts resulting in litigation can be caused by breach of good faith, conflict of interest, breach of contract, negligence, fraud, etc.
It is commonly and incorrectly assumed publicly traded firms are the only companies that need D&O Liability. Recently, it has become apparent that private companies need this coverage as well. They have risk that, although on a smaller scale, can mirror the publicly traded sector.
As such, privately held companies are doing their homework and, along with their insurance agents, determining whether or not D&O Liability is a prudent expense and addition to their insurance portfolio.
Why D&O
Following are three key reasons privately held companies transfer risk to a D&O policy.
- Directors and officers can be held personally liable. Their individual assets can be attached, causing many to reach into their own pockets for legal defense costs in civil and criminal trials as well as regulatory investigations. Fortunately, the insurance industry responded to this risk by including coverage for individual directors and officers on the corporate policy when not indemnified by the employer.
- Lawsuits by competitors are becoming more common. Competitors can sue under federal antitrust statutes or allege interference with business opportunity. They can hold a corporate officer liable for patent or trade infringement. An example of a competitor suit would be if a former employee, now working at a competing shop, used confidential and proprietary information to create an unfair competitive advantage for the new employer. The plaintiff in this case could allege irreparable and immediate injury as well as claiming the ex-employee has possession of its intellectual property.
- “I don’t need this coverage because I don’t have any stockholders” is a myth. As D&O becomes a mainstream insurance product, more privately held companies need coverage. It is important to remember that even with publicly traded companies, only about 25 percent of D&O lawsuits are brought against them by stockholders. Other types of claimants were discussed earlier in this article, and greater coverage visibility is making D&O more desirable in the private sector.
Many business owners believe these types of losses would be covered by their existing General Liability policies, which protect against lawsuits arising from bodily injury or property damage resulting from your operations or product. The D&O risk is different, as it covers losses resulting in economic damages.
While the insurance industry strives to provide customers with the most cutting-edge and up-to-date products available, it is important to understand that your operations change and grow. These conversations between agent and insured sometimes come too late and a loss goes uncovered for no other reason than a lack of communication. Now is the time to visit with your insurance professional and inquire about this and other coverages that may minimize your exposure.