Directors and Officers (D&O) insurance policies are a type of liability insurance for losses suffered as a result of the actions of a company’s board of directors and executives. Directors and officers owe a duty of care to the company’s shareholders, customers and employees. When they breach that duty of care, usually by failing to exercise reasonable care when making decisions, a D&O policy will cover the resulting damages.
D&O policies are payable to either the directors and officers themselves, or directly to the company, to indemnify the insured for the losses. This type of insurance has the potential to cover a wide variety of claims brought against a business for the actions of its directors and officers.
What Types of Claims Does a D&O Policy Cover?
Many people mistakenly believe that D&O policies only cover claims related to securities. In reality, D&O policies cover any number of wrongful actions taken by directors and officers of both publicly and privately-held companies and organizations. They typically exclude any intentionally illegal actions, but otherwise provide coverage for a range of “wrongful acts.” This may include actual or alleged errors or omissions, neglect or breach of duty, or misleading statements by the board of directors.
Because lawsuits can be filed by a wide variety of people, from shareholders to competitors to the government, D&O claims examples are found in many different situations.
In the context of D&O policy claims, a wrongful act may include violation of a statute, improper self-dealing, conflict of interest, fraudulent financial statements, a tort, violation of the articles of incorporation of by-laws or transactions with companies in which the officers or directors have a personal interest. A misrepresentation as to the company’s business or finances may qualify as a wrongful act for purposes of a D&O claim.
For example, if a corporation misrepresented a company’s financial health in order to secure funding from an investor, the investor may later sue the company and its directors for those misrepresentations. A D&O policy would provide coverage for the costs of defending this lawsuit and any resulting settlement or judgment against the corporation and its directors.
Improper Management Suits
Officers and directors may also be sued for improper management of the company’s finances. This may include inefficient administration of the company that results in losses, or extending credit where it is not warranted. This may also arise when a company sells its assets for an unreasonably low price.
If a company has a piece of property valued at $1,000,000, for example, and it sells it for $500,000, a shareholder may sue for financial mismanagement If the sale was made to someone connected to the directors or officers, there may be an additional claim for improper self-dealing. As above, D&O policy would indemnify the cost of the lawsuit and any settlement or award.
Errors in Judgement
There are more specialized forms of cover should officers or directors make mistakes or errors in judgment. This could arise in a number of contexts, such a disseminating false or misleading information, disclosing material facts, or authorizing false or misleading reports. It may also come about when a company is allowed to make improper guarantees.
For example, if a supplement company promises that its elixir will cure a certain ailment — without proof to back up those claims — then customers may sue when the promise proves to be false. A D&O policy would provide coverage for this lawsuit. There is also specialized coverage option known as Errors and Omissions coverage for human errors that result in a defect in a company’s products or services. This type of coverage can extend beyond solely Directors and Officers.
Negligence of Duties
A director or officer may also be sued for negligence in the performance of his duties. This may result from failing to file annual reports, failing to supervise, regular absence from meetings, and failing to inspect the company’s books and records. An example of negligence may be if an employee is embezzling from the company, and the directors and officers fail to find the embezzlement and stop it. The company’s shareholders may sue for damages that arose from this negligence; the lawsuit would be covered by a D&O policy.
Coverage of Fines, Penalties, and Other Legal Costs
D&O policy claims examples can be found in other contexts, such as government investigations. When a government or regulatory agency investigates a corporation, the costs may be high, even if no wrongdoing is found. For example, if a company is suspected of violating laws relating to disposal of toxic waste, the investigation may take years to complete and may require thousands of hours worth of attorney fees. A D&O policy may cover the cost of the investigation, as well as any penalty levied by the government.
Contact BBG for More Information on D&O Policies
These D&O claims examples show that this type of insurance policy can be incredibly valuable in any number of crucial situations. If you believe that your company or organization could benefit from a D&O insurance policy, contact The Business Benefits Group by sending a message online or by calling us today and request a consultation with one of our experienced professionals in our Business Insurance Division.