Eliminating Your Risk with Directors & Officers Liability
D&O insurance protects yourdirectors and officers against claims alleging financial loss arising from mismanagement of the company. Coverage typically extends to three areas:
- Coverage for individual directors and officers
- Reimbursement coverage to the company for a contractual obligation to indemnify directors and officers that serve on the board
- Protection for the company itself
Publicly Traded vs. Private CompaniesOften times, Directors & Officers Liability is thought to be a coverage only necessary for publicly traded companies, but that couldnt be further from the truth. Private companies still face many of the same risks. Business decisions made by directors and officers can quickly impact the finances and operations of any company. The cost of defending corporate lawsuits can be costly, and fines and penalties are increasing, sometimes exceeding the net worth of small private businesses.
- Do your by-laws indemnify the directors and officers of your organization? Many board members wont accept the position without knowing they have indemnification protection. D&O coverage protects the companys balance sheet when there is an obligation to defend an individual director or officer.
- Severability of Insureds is a clause stating that knowledge of material or false statements made by one insured will not be imputed to other insured(s). For example, if one officer was aware that a coverage application contained false financial data, this knowledgewhich would ordinarily bar coveragewill not be attributed to any other directors and officers who were unaware. Most D&O insurers offer varying levels of severability protection within their policies with the broadest being that of full severability.
- Will the policy pay defense costs on behalf of the insured? If a policy is not set up as pay on behalf, individual directors and officers could incur substantial out-of-pocket expenses before they are reimbursed by the carrier.
- Be aware of policies with defense costs that are inside the coverage limits. Under this scenario, defense costs quickly erode the policy limits often times leaving no coverage for payment of claims.
Demanding CoverageAnother way to think of Directors & Officers Insurance is that of an Errors & Omissions policy for your management responsibilities. As a member of the Board, your duties and responsibilities are ever- increasing, and you can be held personally liable for a misstep. Protect yourself by requiring this coverage from your employer.
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