Directors and officers of a company have a wide range of responsibilities. Following corporate laws, by-laws, articles, employment legislation, security legislation and more rest on the shoulders of a company’s directors and officers. As corporate leaders, their actions are often scrutinized at every turn and the wrong step can quickly lead to legal recourse.

Legal recourse can be extremely costly and directors and officers of a company are not the only ones that stand to lose, if and when it occurs. Legal action against a company’s officers and directors can sometimes result in a freezing of funds where the company can only provide a limited amount of funds to protect their officers. Loss of company offers can lead to serious mayhem for any company, large or small. For this reason, any company that employs the use of directors and officers should consider D&O liability insurance.

What is D&O Liability Insurance?
D&O liability insurance, otherwise known as director’s and officer’s liability insurance, is designed to protect directors and officers of corporations from potential lawsuits. Lawyer’s fees, damages, court costs and more may become the responsibility of the board member in question. These fees can become extremely expensive, and without it, board members are at risk. Even personal assets can be subject to legal action for board members.

Who is Covered by D&O Liability Insurance?
D&O liability insurance policies vary from one company to the next. As such, the board members covered may vary from one policy to the next. Board members are always covered, as are their personal assets. With some policies, however, the protection can extend to volunteers and employees that are not on the company’s board. Knowing whether or not your company needs this added protection is essential.

Why are Directors and Officers Sued?
Lawsuits against directors and officers can be the result of a wide range of allegations, but the most common allegations made include fraud, misuse of company funds or assets, insufficient attention to corporate governance issues, hiring and firing decisions, conflict of interest and failure to comply with legislation in the workplace.

Lawsuits can arise for any number of reasons and they are generally initiated by shareholders, employees or creditors of the company. In some cases, misconduct may not have occurred; only suspicion of such action is needed to start an allegation. In other instances, accidental or negligent action may have occurred. This, too, can be sufficient for an allegation.

What to Consider When Purchasing D&O Liability Insurance
Before purchasing D&O liability insurance, there are some things you should consider. While an insurance underwriter will help you in constructing your policy, understanding the risks to your board and to your company is essential when choosing your D&O liability insurance.

Some factors to consider include:
• Policy limits – Policy limits will determine how much coverage your officers and directors have. The maximum coverage is the most the insurance company will spend to help your officers in the face of legal action. Unlike other types of liability insurance, the maximum amount includes all legal fees and court costs. If damages exceed your maximum coverage, the expense must be paid, either by your officer or by your company.
• Entity coverage – Again, while directors and officers are always covered, your company should highly consider including entity coverage, or whole company coverage. This will extend to employees and volunteers that are not on your board of directors.
• Defendant Segregation – Almost all D&O insurance will exclude any criminal activities, like fraud from their policies covered. Unfortunately, when facing a lawsuit against your board, more than just the guilty party can be drawn into the lawsuit. If you do not have a policy that provides defense to the company or any other parties not involved in the action, your business and innocent officers could get caught in the mix. To keep this from happening, look for D&O coverage that has a segregation clause.
• Fines, Penalties and Punitive Damages – In some policies, punitive damages are excluded from the coverage. Punitive damages can sometimes be more than the actual damages. Beware of any clauses that exclude punitive damages and ask the insurance company directly if you aren’t certain whether or not they are included in your coverage.

When the Company Isn’t Responsible
In some cases, the company has no legal obligation to cover or defend their officers and directors. In this instance, even if your company wants to provide protection to its board, you may be unable to find a policy that will extend coverage. Knowing if this is included in your by-laws is essential before you spend time looking for a policy.

How is D&O Insurance Different from General Liability Insurance?
D&O liability insurance does not include general business actions or activities. This includes contracts, meetings, bodily injury, property damage, newsletters and more. To ensure that your business is fully protected, it is best to have both general liability insurance and D&O liability insurance to ensure that your business’ property, assets and employees are protected from all angles.

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This entry was posted on Thursday, March 15th, 2012 at 8:04 am and is filed under Legal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.