Corporate Accountability 101: Directors and Officers Liability
In the wake of unprecedented corporate scandals, the trend of corporate accountability clearly applies to large corporations. But privately held companies, regardless of size, aren’t exempt from litigation arising out of the management decisions of their boards. They, too, are at risk.
Private businesses of all sizes and in all industries are susceptible to D&O lawsuits. Potential plaintiffs include regulatory agencies, shareholders, employees, customers and clients. Clients and customers can claim the company failed to deliver services, to disclose information or disclosed materially false or misleading information. Even competitors bring lawsuits, accusing directors and officers of slander and defamation, which degrades the value of competing products or services. One of the most financially damaging claims to a private company is an employment practices liability lawsuit.
Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a D&O policy specifically provides coverage for a "wrongful act.” This includes an actual or alleged error, omission, misleading statement, neglect or breach of duty.
As a savvy business owner looking to protect your bottom line, how do you weigh the cost of insurance to protect your senior leadership with the potential risk of a lawsuit? As regulatory investigations and defense expenses increase, prices for D&O insurance have gone up as well. Corporate indemnification provides the first line of liability protection; but certain circumstances — most notably, if the company goes bankrupt — necessitates that additional protection is offered to directors and officers.
A variety of factors determine the price of a company’s D&O insurance. Some low-risk companies pay pennies on the dollar; others can pay a lot more, but understand it’s a lot less than the expenses which would be incurred in a lawsuit. Recognizing the cost drivers of D&O insurance — a company’s exposures, legislation and trends in D&O lawsuits — can help you decide what coverage your company needs to mitigate its unique exposures.
Regardless of your company’s size, the legal cost to defend an owner or director is substantial, as are the potential penalties that can be personally incurred. Due to the personal liability risk, which isn’t covered under a personal insurance policy, protecting you and your boardroom talent can be a challenge. To help ensure both your officers’ and company’s well-being, a directors and officers liability insurance (D&O) policy is a critical part of a comprehensive risk financing strategy.
For more information, check out our free Assurance University webinar replay "Minimize Risk with D&O Liability."
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