Thursday, April 2, 2015
Directors & Officer’s Insurance, commonly referred to as D&O, is a specialized form of liability insurance. It is not included in the standard commercial general liability coverage typically carried by any business or not-for-profit organization. It is underwritten by means of a separate application and is priced based on the size, financial stability and operational practices of the organization or business applying.
What is at Risk?
Personal and corporate assets
Why should companies purchase D&O coverage?
Boards of directors and managers can make mistakes and today can be held personally legally liable for them. They are required to walk a fine line between making tough and complex decisions with huge impact on the basis of sometimes limited information available. No matter how prudently they act, any manager’s decision can result in losses for the company or a third party, and the directors and officers who made those decisions can be held personally liable for those losses and can be involved in costly litigation.
A company needs to ensure that its directors and officers have the room to make decisions and D&O insurance supports good corporate governance by making the risks of these decisions manageable. In cases where a company goes bankrupt, D&O is often one of the few assets, providing the company, its shareholders or its creditors a way to recapture some part of that loss.
Common D&O Risk Scenarios
- Employment practices & HR issues
- Shareholder actions
- Reporting errors
- Inaccurate or inadequate disclosure (i.e. in company accounts)
- Misrepresentation in a prospectus
- Decisions exceeding the authority granted to a company officer
- Failure to comply with regulations or laws
What is Not Covered?
- Intentional non-compliant acts
- Illegal remuneration of personal profit
- Property damage and bodily harm
- Legal action already taken when
the policy begins
- Claims made under a previous policy
- Claims covered by another insurer
The most frequent source of claims is claims related to employment or HR issues such as discrimination, sexual harassment or wrongful termination. Currently 40% of D&O claims are employment related claims. In most cases managers did not act themselves, they simply did not enforce employee conduct rules against discrimination and harassment.
D&O is not just coverage for large corporations who deal in international business. Any company’s and/or not-for-profit organizations directors and officers and managers could be at risk of a potential claim. All current, future and past directors and officers of a company and its subsidiaries can cover under a D&O policy, which can also include non-executive directors. That said, not all D&O policies are created equal and it is therefore crucial that when selecting this coverage you are dealing with a broker that is astute and aware of how to craft such a policy and isn’t simply relying on an “of the shelf” commodity to serve you.
D&O is a standard part of any for profit and not-for profit insurance program. If your business or charity does not have it, it is time that you do. If you do and it has not been carefully reviewed to ensure compliance with recent legislative changes it is time that you do. D&O coverage is necessary to enable managers to make decisions without the threat of personal liability hanging over them and it is there to respond when mistakes happen.
More information regarding Business Protection Services can be found on our website at www.reithandassociates.com or call us at 519-631-3862.
We would be glad to take the time to know your business and the challenges that you face to protect the people and property that matter most to you.
Commercial Account Manager
Reith & Associates
Tel. 519-631-3862 ext. 231