Directors and officers of a company can be sued over management decisions that result in adverse financial consequences. With directors and officers (D&O) liability insurance, companies can stay protected from losses in the event that a claim is made against them. Directors and officers insurance covers all types of companies, including privately held firms, for-profit businesses, not-for-profit organizations, and educational institutions. Learn more about directors and officers insurance, what it covers, what types of claims are associated with these policies, and how you can get D&O insurance.
Claims Covered by Directors and Officers Insurance
Directors and officers insurance is often associated with larger for-profit companies. However, even smaller businesses can benefit from the coverage that D&O policies can provide. It is important to understand that directors and officers liability insurance can cover a wide range of claim types made against directors and officers of both public and private companies and organizations. These claims range from alleged breach of duty to the release of misleading statements. When these types of costly mistakes are made, it is important to have an established insurance policy to protect your interests. The most common types of claims that are generally covered by D&O insurance include:
- Breach of Duty. If directors and officers are accused of failing to carry out their duties, they could face a D&O claim. There are countless scenarios in which this can occur. For example, a claim could arise if it is found that an officer failed to stop illegal activity within a company. A D&O claim can also occur when directors and officers do not adhere to the board’s bylaws.
- Wrongful Acts. Wrongful acts in relation to directors and officers claims can range from misrepresentation of a company’s business to a conflict of interest. Claims can also be associated with violations of a statute, fraudulent financial statements, and improper self-dealing. For example, a company may misrepresent the state of their finances in order to secure funding from investors.
- Mismanagement. Directors and officers may be sued if they improperly manage a company’s finances resulting in a financial loss. This type of situation could arise when a company sells its assets for a price far below market value or when the administration of a company is found to be inefficient, resulting in losses. For example, a claim may be made if a company makes poor business deals during mergers and acquisitions.
- Errors in Judgment. A D&O claim may be associated with an error in judgment from a director or officer. Errors in judgment may be made due to misleading information, failure to disclose facts, or when authorizing false reports. An error in judgment may also apply if a company makes an improper guarantee. For example, if a company guarantees that their supplement will cure a certain illness or disease and the promise turns out to be false.
In short, D&O insurance can cover most types of breach of duty, misrepresentation of company assets, and misuse of company funds. It also covers fraud, theft of intellectual property, and failure to comply with workplace laws.
Why Protect Company Leaders
Even the most qualified directors and officers make mistakes. It is important to protect company leaders and the business as a whole against significant financial losses that can occur when a claim is made. In addition to paying for claims, there are a number of reasons to maintain a directors and officers insurance policy for your company. One of the biggest reasons to get a D&O insurance is to retain your strongest leaders. Most directors and officers will be hesitant to join or stay with your company if they are exposed to personal liability.
There are other reasons to acquire D&O insurance, including for future investments. Many private equity firms will require a company to have directors and officers insurance coverage before agreeing to make an investment. Of course, a D&O policy can also be invaluable if your company is faced with a claim. Even if your business is exonerated of wrongdoing, you could face some hefty legal fees stemming from the lawsuit. With a D&O policy, your company’s legal fees will generally be covered in full.
Directors and officers insurance is recommended for any type of business that has a corporate board or an advisory committee, including non-profit organizations. Companies that make millions in revenue are not the only ones who can be sued due to the mismanagement of company affairs. Smaller businesses with few assets also face similar risks and require protection from costly claims. While your company can have dozens of rules and regulations in place designed to prevent legal claims from arising, there is no way to prevent claims indefinitely. D&O insurance is your best defense against unexpected claims relating to directors and officers.
Choosing a Directors and Officers Insurance Policy
You can find directors and officers insurance policies in numerous forms. The type of policy you choose will depend on several important factors, such as the unique risks that your business faces and how your business is organized. D&O insurance policies are generally categorized by the liabilities, legal costs, and various exposures that are covered. To ensure that you acquire the right policy for your business, it is best to work with an insurance company that has a thorough understanding of directors and officers liability and the risks that come from these types of claims.
Directors and officers insurance is a smart way to protect directors, officers, and other high-ranking company officials from legal action taken by individuals like investors, vendors, competitors, customers, and employees. While acquiring D&O insurance is not always required depending on the individual business at hand, a policy can provide unparalleled protection and peace of mind. The costs associated with a D&O lawsuit can be tremendous and have the potential to financially ruin a company if a business is not protected. For more information about directors and officers insurance or to acquire a policy for your business, contact the experienced business insurance brokers at Business Benefits Group today.