Your day is starting like any other- the official priority list included getting the stack of checks sitting on your desks signed so they could get them out into the mail. You answer some emails and realize that you may need to get involved with a vendor dispute about an order that was never delivered. With your voicemail messages checked, you are finally getting to those checks.
As you sip on the cold coffee, your desk phone rings. Your assistant says that the sheriff is here to see you. Assuming that this is just a visit regarding something suspicious seen in the area… or maybe a community watch program… you are totally unprepared for the summons that he hands you.
Directors and Officers Liability
is a liability insurance policy to protect the principals of a company, or the business itself, if legal action is brought for alleged wrongful acts in their position as directors and officers. The insurance coverage assists with defense costs. The coverage could include defense costs arising out of criminal activity and regulatory investigations or trials. Intentional illegal acts are typically not covered under D&O policies.
Not Just For "Directors" And "Officers"?
While somewhat counterintuitive, many private companies would benefit from purchasing Directors and Officers Liability insurance policies. Many view D and O insurance primarily as protection against shareholder lawsuits. Private companies and sole proprietorships do not often face lawsuit threats from shareholders. Nonprofits may have a board of directors, but may have little to do with the day-to-day operations.
Still, shareholder lawsuits make up only about 40% of all D&O claims. 60% of the claims come from other parties: customers, vendors, creditors, etc.
These claims can arise from unfair competition or allegations from a competitor or of financial misstatement to a creditor. For example, D and O policies can provide coverage against a bank suing your company by claiming information provided on a loan application was materially false. D and O policies can also provide scheduling for the defense costs of regulatory and administrative investigations.
Private companies purchasing D &O insurance need to be aware of a few potential issues:
- Companies should ensure that their policy covers all subsidiaries and affiliates. The typical D&O policy will cover any majority owned affiliate but may not cover minority owned companies unless specifically scheduled when purchasing the policy.
- Companies should ensure their policy gives them the right to choose their own attorney.
- Companies should ensure that their policy provides for severability. D&O policies will not cover the costs of intentional wrongdoing, but severability will ensure that such wrongdoing only voids coverage for that intentional act while ensuring continued coverage for the rest of the company and providing ongoing protection for innocent parties.
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