Shared Liability Among Directors and Officers In the eyes of the legal system, Directors and Officers (D&O) of an organization share liability, meaning even non-executive directors can be held accountable for the actions of other directors. This could lead to a court battle over something a colleague did, even if you were unaware of their actions.
Recently, there has been an increase in claims on Directors’ and Officers’ policies, driven by stricter governance guidelines and enhanced regulatory oversight. While many insurers are willing to cover this risk, the challenge lies in selecting the right one.
What Does Directors’ and Officers’ Insurance Cover?
Directors’ and Officers’ (D&O) liability insurance provides financial protection if you are personally sued. It covers claims made against you or your co-directors within the scope of your regular business activities, including legal fees and any damages incurred.
Characteristics of a Good D&O Insurance Policy
A robust D&O insurance policy covers the costs of defending against claims, as well as any resulting damages or settlements. Any allegation, no matter how minor or frivolous, must be thoroughly defended to avoid a default judgment.
Key Areas Covered by D&O Insurance Include:
- Entity Coverage for Employment Practices Liability Claims
- Coverage for Official Investigations
- Crisis Management
- Entity Coverage for Securities Claims (for listed companies)
- Protection for Retired Directors
Other Common Claims Include:
- Serving on external boards
- Wrongful termination, sexual harassment, or discrimination claims
- Initial public offerings
Directors and officers can be held liable for their own actions, inactions, and those of their co-directors. The personal liability of directors for a company’s performance is unlimited. Shareholders frequently sue for mismanagement.
Breakdown of D&O Claims
Data from a leading D&O insurer indicates that D&O claims typically involve:
- Regulators: 40% of claims relate to regulatory governance.
- Clients/Competitors: 30% of claims arise from disputes with clients or competitors.
- Employees: 20% of claims are initiated by dissatisfied employees.
