Why ignoring Directors and Officers insurance is critical for commercial and non-profits of any size

Why ignoring Directors and Officers insurance is critical for commercial and non-profits of any size

Nowadays, it doesn’t matter how small or big a business is; the need for Directors and Officers (D &O) insurance is justified. Whether you have three employees or 1000 employees, without D&O, your leadership team will be vulnerable to lawsuits. Employees are the most common source of D&O claims, and below are the most common reasons behind those claims:

• Wrongful dismissal
• Discrimination, including workplace and sexual harassment
• Breach of employment contract
• Failure to address health and safety concerns

Ultimately, a lawsuit pertaining to any of the above will fall squarely on the shoulders of the leadership team, and without D&O insurance, they can be personally sued. To limit the exposure to claims, the first risk management strategy to implement is ensuring directors and officers have a crystal clear understanding of the duties that come with the position.

Regarding basic corporate functions, directors and officers of both private and public companies have a number of specific duties. Directors and officers are expected to fulfill these duties and they have an obligation to act in a company’s best interests. The following are some basic executive duties directors and officers should be aware of.

Duty of diligence

Sometimes referred to as duty of care, this responsibility requires directors and officers to act in good faith. This means that directors and officers must consider all available information before making a decision and act in the same way a reasonable person faced with the same decision and responsibilities would act.

This duty requires not only reasonable behaviour with respect to matters submitted for approval, but also reasonable inquiry and monitoring of the organization’s affairs. The duty of diligence may be higher for directors and officers of charitable or other types of not-for-profit entities in certain jurisdictions.

Duty of loyalty

Directors’ and officers’ duty of loyalty is meant to prevent them from engaging in conduct that would otherwise hurt or take advantage of the company they serve. Through this duty, directors and officers have an obligation to avoid any conflicts of interest. Some examples of leaders breaking their duty of loyalty include the following:

• Gaining secret profits or unfair gains through personal transactions with or on behalf of the organization
• Competing with the organization or stealing corporate opportunities
• Profiting from the use of the organization’s material, non-public information

Duty of obedience

Per their duty of obedience, directors and officers are obligated to follow the statutes and terms of their organization’s agreements. Directors and officers may be held liable if they authorize an act that is beyond the powers established by their company’s charter.

It should be noted that non-profit organizations are frequently regulated by a multitude of statutes, rules and regulations—many of which are unfamiliar to outside directors and officers. As such, it’s important for directors and officers of these organizations to be extremely careful in order to avoid a claim. Failure to comply with technical requirements may subject the directors and officers to personal liability for any organizational damage.

D&O liability

As mentioned above, the most common source of D&O liability is employees, but there are several other exposures to consider.

For most commercial organizations, increasing market share is a common goal. However, the competition is always watching, and if an organization’s competitor believe that they have been unfairly disadvantaged by dishonest or illegal behaviour, they may seek legal recourse. Allegations may include breach of intellectual property, collusion, anti-competitive behaviour and misappropriation of trade secrets. What’s more, directors and officers may be held liable for actions that are perceived as misleading or defamatory, with claimants seeking damages for their alleged losses.

Director and officer conduct is also under scrutiny by the government, regulatory authorities, shareholders/investors and customers, the lifeblood of any organization. Even if a business becomes insolvent, creditors will be on the lookout for any instances of mismanagement by the directors and officers. It’s not unheard of for creditors to go after executives in attempt to recover outstanding funds.

D&O insurance policy

Dedicated D&O insurance is one of the best ways to protect against management risks. This coverage protects the personal assets of directors and officers in the event the company does not pay defense costs or fund indemnification, and it is essential to helping organizations attract qualified individuals to serve on their boards.

D&O policies can contain two types of coverage: the first reimburses the insured organization when it is legally obligated to indemnify corporate directors and officers for their acts; the second provides direct coverage to directors and officers when the organization is not legally obligated to indemnify them. D&O forms are written on a claims-made basis and typically exclude intentional/dishonest acts.

Employment Practice Liability (EPL) is a form of liability insurance covering wrongful acts arising from the employment process. As mentioned above, the most frequent types of claims alleged under such policies include: wrongful termination, discrimination, and sexual harassment. The forms are written on a claims-made basis and generally exclude coverage for large-scale, company-wide layoffs. This coverage can be included in a D&O quote and is optional.

Any sized commercial organization or non-profit should be prepared with both D&O insurance and solid risk management strategies, because often, a D&O claim appears without any warning. We are living in a litigious era with 24/7 media coverage. Practically every day, a new video showcasing alleged wrongdoing goes viral. The pressure will always be on directors and officers to answer the bell. Enlisting the expertise of a professional insurance broker to help navigate D&O insurance is a crucial step to take sooner, rather than later.

Resources:

• Risk Audits
• Link to D&O insurance products
• Be More Than a Bystander Blog