Anyone who serves on the Board of Directors is a possible target for a variety of lawsuits and complaints about their conduct - particularly if the public or if plaintiff's attorneys perceive them to have "deep pockets."
This can lead to devastating consequences for board members and directors who are unprepared: While corporations typically protect stockholders against personal liability arising from claims against the corporation, board members can be and are held personally liable for the consequences of their behavior as directors, both intended and unintended. Examples of common claims against directors include, but are not limited to:
- Violations of fiduciary duty to stockholders
- Failure to provide services
- Failure to disclose conflicts of interest
- Discrimination claims
- Mismanagement of company or organization assets
Even where claims are unfounded, directors often find the costs of mounting a defense to be a significant burden on their personal finances, running to hundreds of thousands of dollars in some cases. Most board members don't even know where to find the best attorneys for their own defense.
History of Directors and Officers Insurance
D&O insurance was first sold by Lloyd's in the 1960s, though it didn't become popular until the 1980s, when plaintiff's lawyers made a cottage industry of targeting board members involved in a slew of mergers and acquisitions that had been occurring over the previous decade.
Today, the there are three basic kinds of D&O coverage on the market. The variety you want depends on the structure of your organization, your role in it, and the management and other liability coverages already in place.
- Side-A. This kind of policy covers directors and officers who are not indemnified by the corporation. Essentially, this is individual coverage.
- Side B. This coverage protects a corporation when it indemnifies directors and board members. Under this structure, the company agrees to take on the risk normally borne by individuals on the board, and then protects itself against that risk by purchasing Side B. coverage.
- Side C. This kind of policy covers claims brought specifically under securities laws. It would be appropriate only for publicly-traded companies and some very large privately held companies. Smaller companies may wish to purchase "entity coverage" which provides somewhat broader protections.
Individual board members can also purchase a Broad Form Side A DIC (Difference in Conditions) policy, to supplement any Side A coverage in place, and to fill the gaps in coverage already in place between Side A and B.
If you own or are on the Board of a corporation, D&O insurance is a must. Just finding the right attorney can be a daunting challenge to those who aren't experts in director liability litigation. With D&O insurance in place, you can limit your liability and risk with just a small premium.
D&O Carriers are experienced at managing and limiting claims - frequently protecting your professional reputation at the same time.
In the United States, D&O insurance is generally purchased by the corporation to protect both itself and its directors and officers, rather than as an individual purchase by the directors themselves. Corporations do this in order to ensure that they are attracting the most qualified people to serve in these crucial positions. Many top professionals in most industries would not agree to serve on a Board of Directors or as a corporate officer unless the corporation agreed to put this protection in place.
Please contact our agents today at 314-351-HALO(4256) to discuss your Board's insurance program.