There is a sharp rise in lawsuits against corporate officers, and those who sit on boards of corporations, for both profit and tax-exempt purposes. Towers Watson’s 2011 study found that nearly 7 in 10 publicly traded companies were involved in shareholder lawsuits against the Board of Directors within the past ten years. Private companies weren’t exempt, either. More than one private corporation reported a lawsuit against it in the past ten years.
These lawsuits can be brought from many sources: Former executives and shareholders, current or former employees, disgruntled middle management and employees, as well as public interest groups.
Anybody who serves on the Board of Directors could be a target of a range of lawsuits or complaints about their conduct, especially if they are perceived by the plaintiff’s lawyers as having “deep pockets.”
Board members and directors who do not know how to deal with this can face devastating consequences. Although corporations generally protect stockholders from any personal liability arising in connection with claims against the company, board members may be personally liable for the consequences resulting from their conduct as directors. Common claims against directors include but aren’t limited to:
• Violations of fiduciary duty to stockholders
• Failure to provide services
• Failure to disclose conflicts of interest
• Discrimination claims
• Mismanagement of company or organization assets
And much more.
Directors often find mounting a defense to be an expensive expense, even if the claims are not substantiated. In some cases, it can cost hundreds of thousands of money. These lawsuits average $308,000 per defendant. Many board members don’t know where to look for the best lawyers for their defense.
History of Directors and Officers Insurance
D&O insurance was first sold by Lloyd’s in the 1960s, though it didn’t become popular until the 1980s, when plaintiff’s lawyers made a cottage industry of targeting board members involved in a slew of mergers and acquisitions that had been occurring over the previous decade.
Basic Structures
Today, the there are three basic kinds of D&O coverage on the market. The structure of your company, your role, and existing liability and management coverages will determine the type of D&O coverage that you choose.
• Side-A. This policy covers officers and directors who are not covered by the corporation. This is basically individual coverage.
• Side B. When it insures directors and members of the board, this coverage provides protection for a corporation. This structure allows the company to assume the risk that is normally borne on the board by the members of the board. The company then purchases Side B. insurance to protect itself from this risk.
• Side C. This kind of policy covers claims brought specifically under securities laws. It is not appropriate for public-traded companies or large privately owned companies. You might consider purchasing “entity protection” for smaller companies, which gives you a wider range of protections.
Broad Form Side A Difference in Conditions policies can be purchased by individual board members to augment existing Side A coverage or to fill gaps between Side A and Side B.
If you own or are on the Board of a corporation, D&O insurance is a must. Finding the right attorney for director liability litigation can be difficult for those not experienced. With D&O insurance in place, you can limit your liability and risk with just a small premium.
D&O Carriers are experienced at managing and limiting claims – frequently protecting your professional reputation at the same time.
Application
In the United States, D&O insurance is generally purchased by the corporation to protect both itself and its directors and officers, rather than as an individual purchase by the directors themselves. These insurance policies are purchased by corporations to ensure they attract top-quality people to fill these important positions. Without the protection provided by the corporation, top executives in many industries would not agree that they were able to serve on a Board of Directors.
Claims-Made vs. Occurrence Provisions
One of the main provisions that distinguish policies is whether they will protect claims for actions and omissions that were made before coverage was in force. One example is when a board member is accused of committing a tort in 2013. In 2014 the company switches D&O coverage or initiates coverage. The tort is discovered in 2015. In 2015, someone sues the director(s), officers, or both. If the lawsuit is filed during coverage, a claims-made policy will provide protection. An occurrence policy provides benefits depending on the date of the accident that caused the lawsuit. It all depends on what type of coverage you have had before and how it was structured.
You may also want to buy an extended reporting period (or ERP) to maintain coverage after your policy is cancelled. This covers events that have occurred but no lawsuit has been filed.
It can be difficult to switch from one carrier to the next. This means that you need to make important coverage decisions. Your agent should be able walk you through how to combine current and past coverages to avoid gaps.
Criminal Acts Exclusion
D&O insurance is very closely related to errors and omissions insurance, which is often purchased by professionals such as attorneys, financial advisers, accountants and other white collar, licensed individuals. This insurance does not cover fraud or embezzlement, but it does cover other criminal acts. Policies generally do not cover acts that are “wrongful”, such as misstatements or omissions when working for an organization. While shopping for policies, make sure you carefully consider exclusions and the covered acts.
