Does my company need D&O insurance?

February 13, 2014

Directors and Officers coverage insures against claims stemming from alleged wrongful conduct of a company directors and officers. These types of claims typically won’t be covered by other insurances such as professional or general liability coverage as some may think. Management liability coverage, which includes D&O, is its own animal and without it a business’s directors and officers may find themselves exposed in the event of a lawsuit where they can be personally named as well as their companies.

Quite often company owners figure that they will need Director and Officers coverage if they are in control of a publicly held company, or if there are stakeholders such as venture capital funding. This is true, these are situations a company may come across that would act as a trigger for management to determine a need for D&O coverage. What some fail to recognize is that just because there may not be internal or external shareholders involved in a company, it would not shield management from risks involving creditors, customers, competitors, even its own employees.

One common source of claims will stem from a company’s employees, more specifically, ex-employees. Discrimination, harassment, wrongful termination and retaliation are all claims that can be made against an employer and by extension, the directors of a company. Employment Practices Liability Insurance or EPLI, is commonly part and parcel of a broad based policy and would provide coverage against such claims.

Clients or competitors may allege misconduct on the part of directors and officers, wasting of corporate assets, allegations of theft of intellectual property, false advertising claims, antitrust… these are all aspects that can be the basis for a claim against a company’s directors and officers. There are always cases of fraud, misrepresentation and breach of fiduciary duty that are most often associated with a D&O claim. Then there is of course issues that stem from having stakeholders in your company. Should such stakeholders take issue with the decisions of management in a private or public company, litigation may ensue.

The point in all this is that there are many instances for a small company where directors and officers would need the protections of a D&O policy.

Directors are increasingly being held personally responsible for a company’s management decisions.  Claims brought against individuals can threaten both the personal wealth of such individual directors & officers and the financial viability a company.

In some cases, companies are obligated to indemnify directors and officers in such events. Many companies’ articles of association stipulate that the directors and officers will be indemnified in certain situations. This does not necessarily provide directors and officers with complete protection, as their company may not be able to indemnify them, perhaps because it has insufficient funds. Many claims made against directors are from investors and creditors and arise when the company is insolvent, or it may not be permitted by its articles of association to do so in certain situations.

Looking for more information or have any questions as this may relate to your company?

For more information on the topic or guidance, use the form below or reach out directly to Nathan Therrien at 978-400-7014 or at nathan@bibsma.com

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