The Need for Directors and Officers’ Insurance
Welcome back to the classroom! Today’s topic is the second leg of understanding directors’ and officers’ insurance coverages. We know that corporate directors and officers operate in an environment littered with legal, financial, and reputational risks. It seems like every time there is a dispute, immediate legal action follows. Typically, this insurance coverage is the defense against the financial loss due to those legal actions. The insurance can cover legal fees, loss of business income, and other monetary losses, but that depends on your coverage (you get what you pay for in this business to be blunt). Without the coverage, if the directors and officers are held liable, they could be paying out of pocket, losing their houses, or declaring bankruptcy.
Sometimes claims are sound accusations against directors and officers and other times those accusations are more emotionally driven than anything else. In business, lawsuits are the landmines in the battle for success. Despite best intentions and diligent efforts, directors and officers may find themselves in lawsuits. Sometimes these claims come from the fact that directors and officers are under the microscope more than anyone else and other times these claims come from serious wrongdoing (Bernie Madoff). What I am trying to say is that accusations can arise from decisions made in good faith and every D&O claim is not because the CEO intentionally acted wrongfully. Securing D&O insurance is not only a brilliant financial decision but also a fundamental aspect of fulfilling this fiduciary responsibility. By obtaining D&O insurance, directors and officers show their commitment to protecting the company’s assets, preserving shareholder value, and upholding corporate governance standards.
Key Considerations in D&O Insurance
When looking for D&O insurance, companies need to consider several key factors:
- Coverage Limits: Ensure that the policy provides adequate coverage limits to address potential liabilities. You wouldn’t buy shoes that cover half your feet, the same with insurance. Be fully covered by your specific needs.
- Exclusions and Limitations: Pay attention to any exclusions or limitations outlined in the policy, as these could impact the extent of coverage available in certain scenarios. That is where we (Three Arbor) come in and do our job knowing exactly where you are covered.
- In-House Training: Implement risk management practices within the organization to minimize the likelihood of claims and demonstrate a commitment to sound corporate governance. Again, this is something we offer within our partnership with KPA.
An example of a D&O claim:
You are the CEO of a Fortune 500 company, congratulations! You and the rest of the C-suite realize that the company’s costs are high and could be lowered mainly in the department of salaries and wages. And as the CEO your priority is to maximize shareholder wealth by adhering to ethical business practices, not to employ as many people as possible. Therefore, you and the rest of your team decided to lay off 25% of the workers on the manufacturing line. People do not like getting fired and causes quite an inconvenience in their life. So, they sue you on the grounds of wrongful termination, maybe their lawyer throws in ageist or racist motives trying to make you pay the most. After all, that attorney is working to get the best deal they possibly can for their client not necessarily what is justified. All the sudden those workers you laid off are bringing a massive lawsuit against you with wrongful termination claims from discrimination to lost wages. Did you do anything wrong? No, but that does not change the fact that people are furious with you. You call your insurance agent (Three Arbor of course) and it shows that you a have large D&O coverage in place so any legal fees or lawsuit costs will be covered (this is not every time it is heavily reliant on the amount of coverage you want to purchase). Fast forward three months, shareholders are happy, the lawsuit is settled, and insurance covers the headache at hand, now you can get back to doing what you do best.
