Directors and officers liability insurance covers a business's legal liability for "wrongful acts" of its directors and officers acting within their capacity for the business. A typical policy defines "wrongful act" as including errors, misstatements, misleading statements, acts, omissions, neglect, or breaches of duty actually or allegedly committed or attempted by an individual in her capacity as a director or officer of the insured business.
Directors and officers are subject to lawsuits from many sources, including the entity they work for, shareholders, employees, government entities, competitors, vendors, and other third parties such as consumer groups or groups that represent segments of the population. Leaders of all types of organizations are vulnerable, though the source of a legal claim will vary by the type of entity. Most claims against public companies come from shareholders, while employees file most of the claims against non-profit organizations and half the claims against private companies. Customers and competitors are also frequent sources of suits against private companies.
D&O insurance covers many types of claims, including:
- A lawsuit by one shareholder against the majority owners, claiming that the company lost money because the majority gave themselves excessive compensation.
- A key employee leaves one company and joins a competitor as a director. His former employer sues him and the competitor, claiming that he violated his contract and used confidential company information with his new employer.
- Shareholders sue a company and its directors and officers, claiming that they misrepresented the quality of a potential new product when they sought funding for its production.
- A shareholder sues the president of a company for failing to promptly notify shareholders of a major pending transaction and for not pursuing litigation against a partner company that did not live up to its agreement.
- A lender sues a company for allegedly failing to repay a loan.
- Members of a private company's board of directors are sued for allegedly using their positions for personal gain.
- The government sues a company for alleged anti-trust activities.
Even though courts dismissed some of these lawsuits, the legal defense costs were still significant; D&O insurance covers these costs. Because all organizations and their leadership are vulnerable to these types of claims, they should work with professional insurance agents to identify companies that can provide the coverage they need at a reasonable cost. Businesses face many different risks today; consequently, D&O insurance is a necessity.
Contact a HALO Insurance agent to discuss your coverage options, 314-351-HALO (4256).