Being a good citizen and volunteering to serve on the board of directors of even a small local nonprofit can bring personal liability. In fact, no matter whether nonprofit or for profit, small or large, private or public, directors and officers shoulder personal liability as they serve. But the larger or more prominent the organization, the more the responsibility, and the greater the risk. D&O coverage protects against this exposure.
Every member of a board of directors or officer of a corporation assumes certain personal liabilities, no matter whether filling a paid or voluntary position. These liabilities are particular to their position and not protected under a general liability insurance policy. Read more on Risks Assumed By Directors and Officers of a Corporation
D&O insurance lawsuits can arise from several sources:
- Other directors
- Organization members
- The public
Directors and officers (D&O) insurance covers legal fees, settlements, and other legal costs. It protects not only the directors and officers, but the company itself. D&O insurance protects the personal assets of corporate directors, officers, and their spouses in the event they are personally sued for actual or alleged wrongful acts in managing. It provides the financial backing for losses stemming from their position.
Lawsuits for improper management of the company or its finances are sometimes levied against directors and officers. Allegations can include inefficient administration leading to poor financial performance. Other management failures can include:
- Failure to implement reasonable business protections
- Selling company assets for too low a price
- Negligent management of funds
- Careless negotiation of company contracts
- Inappropriate behavior leading to financial impact
An example of improper management we often cite originated with a client business from which an employee embezzled over several years. Not only did this client lose significant funding, but the board of directors could have been held personally responsible due to negligent hiring practices and poor oversight that led to the loss.
Errors in Judgement
Directors or officers may be liable for mistakes or judgment errors that result in business harm. D&O coverage can protect in such a situation. Directors may erroneously provide misleading information, supply improper guarantees, disclose or fail to disclose material facts, or authorize reports that are later determined to be false. Should these errors be detrimental to the business and found to be negligent, a party with business interest may seek compensation.
A wrongful act may include a breach of duty, breach of trust, neglect, misleading statement, mistreatment, breach of a fiduciary obligation, error, omission, libel, slander, wrongful trading, breach of authority, or any other act that gives rise to legal liability. A misrepresentation of the company’s abilities or finances may qualify as a wrongful act as well. D&O coverage protects against the costs of defense and any resulting settlement. A claim example is erroneously misrepresenting financial health to an investor. In such a case, the investor may sue the company and its directors for damages stemming from those untruths.
Fines, Penalties, and Costs
D&O coverage can also include costs related to government investigations. When a regulatory agency investigates a company the investigation can take years and costs can be excessive, even if no wrongdoing is found. D&O coverage protects against the cost of the investigation and resulting penalties.
Who Should Purchase D&O Insurance?
The growing rate of D&O insurance claims makes this protection necessary for businesses and organizations of all sizes. Such claims are no longer limited to larger organizations, but occur against small businesses as well. It is incumbent upon each company to protect their directors and officers, many who are unaware of the personal liability they are assuming on behalf of the organization.
D&O Coverage Rates
Rates for D&O coverage are predicted to increase significantly, as much as seventy percent, in 2021 and beyond. Further, fewer insurance companies will be offering the coverage, insurance limits will be restricted, and higher deductibles will be applied. These changes are due to several market influences culminating at once. Read more about the 2021 D&O Insurance Market Outlook. Now more than ever it is imperative to have a strong insurance agent with significant negotiating power and possessing critical technical knowledge to advise regarding your company’s D&O coverage.
Questions regarding D&O coverage? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office and provided a phone number that rings right on their desk.
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