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Posts|January 03, 2023

Directors and Officers Liability Insurance-Does your company need it?

By Jeff Cavignac
President CPCU, RPLU, ARM

Nearly all publicly traded companies (Elon Musk and Tesla are one noticeable exception) and most, larger privately held companies carry Directors & Officers (D&O) Liability Insurance.  Many mid-size and small companies however don’t perceive the need.  Unfortunately, they are subject to the same types of claims faced by larger companies, that a D&O policy will typically cover.

In a 2016 Survey conducted by the Chubb Group of Insurance Companies it was discovered that one in four privately held companies experienced a D&O claim in a 3-year period.  These claims are complex, time-consuming to deal with and expensive.  The average loss amounted to almost $400,000 for those that did not have D&O Insurance.  Recognize that this survey was done 6 years ago, and these numbers have likely increased.  While not every small and mid-size company will purchase D&O coverage, every small and mid-size company should consider it.

What does D&O Cover? 

Directors and Officers insurance protects your company’s management should they be personally exposed to liability claims for the business decisions and actions they made while running the business. A D&O policy can also protect the company as well.  It provides coverage for the legal fees, settlements, and other related costs that arise from various allegations including breach of fiduciary duty, misrepresentation, misuse of company funds and failure to comply with workplace related laws or other statutes or laws.   These types of claims are not covered by a general liability policy or a professional liability policy (if the company has one).

  • General Liability only extends to damages resulting in bodily injury or property damage.  Most claims against Directors and Officers are based on financial damages.
  • Professional Liability claims must be caused by an error or omission arising out of the professional services provided by the firm…not decisions made at a management level.

Who might bring a suit against Directors and Officers? 

A number of different parties may allege that a company’s mismanagement has caused them financial harm.  This includes Shareholders, Investors and Partners.  It would also include companies that you have merged with, acquired or have been sold to.  Allegations might include financial performance, discrimination in stock or other offerings, conflict of interest, bankruptcy and financial reporting.  Customers or Consumer Groups might also bring a suit alleging things such as refusing credit, unfair debt collection, deceptive trade practices, contract disputes, restraint of trade, and dishonesty.  A competitor might allege violation of antitrust laws, copyright/patent infringement, business interference or defamation.  The list goes on.

Other Benefits of D&O Coverage

Many small and mid-size companies don’t have relationships with corporate attorneys experienced in litigation.  D&O Insurers do.  D&O Insurers also have knowledgeable claims adjusters that can effectively work with you to manage claims to obtain a fair outcome.

Final Thoughts

Business litigation is expensive and time-consuming.  It is also intimidating when that lawsuit first hits your desk.  Many small and mid-size companies don’t have relationships with corporate attorneys experienced in this type of litigation.  D&O Insurers do.  D&O Insurers also have knowledgeable claims adjusters that can effectively work with you to manage claims to obtain a fair outcome.  Any business, regardless of size should evaluate whether or not Directors and Officers Liability Insurance should be a part of their risk management arsenal.

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