Business insurance for directors and officers

One of the features of a country that could benefit from a little moderation is the knee-jerk reaction of many people who suffer a loss and feel they should sue the ones possibly responsible. For decades, the major growth industry has been the business of litigation attorneys. They have been printing money on the back of their willingness to sue anyone and anything that moves. This is not to make a moral judgement. That’s what we pay them to do and, for the most part, they do it very effectively.

Once you acknowledge our society is highly litigious, always put protection in place. We are living in very difficult economic times. A lot of people who invested in the stock exchange have lost money. Angels who put money into start-ups have been burned. Employees have been terminated. Competitors feel they have lost unfairly thanks to the way you have run your business. Your customers feel you have not always provided value for money. Any one of these people, or all of them, could sue you tomorrow. All the directors and officers of companies are at risk. For these purposes, it makes no difference whether the company is big or small, for-profit or nonprofit. Unhappy people sue regardless. In many cases, it also makes no difference whether the claim against an individual has merit. It’s fairly routine for attorneys to join directors and officers to claims against the company alleging whatever wrongdoing seems possible in the circumstances or claiming a breach of the fiduciary duty owed to the company.

The intention is always to put financial pressure on the company and all the individuals joined as defendants to settle. As defendants, the bill for their own legal team can be crippling unless there’s insurance in place. This is the role of a D&O policy. It covers all directors and officers against claims of wrongdoing while in office and pays the costs of the defense. But, before you run out to buy this type of policy, you need to understand the strengths and weaknesses. First, do not confuse this cover with Errors and Omissions Liability which protects the company against claims of negligence or other failures of performance in the design and manufacture or products or the delivery of services. E&M does not cover the duties of the senior officers of the company. From this you will understand it’s a good idea to carry both types of business insurance. Indeed, many competent people will not accept the role of director or senior officer without this cover in place and you may lose good people if the cover is thought inadequate. Why should anyone competent risk their personal assets when working for a company?

Now recognize the most common actions against directors and officers allege harassment and discrimination. So always check the wording of the policy to ensure there’s good cover for Employment Practices Liability. The most usual exclusions are for a claim brought by one director against another, or for dealing with personal allegations of fraud or the deliberate breach of laws involving dishonesty. You also need to look very carefully to see the borderline between claims covered by the general business insurances liability policy. Only when you find the right balance should you buy.

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