Duties of Loyalty, Obedience and Due Care
D&O stands for directors and officers, this policy exists to cover the financial losses due to decisions made by C-Suite members, board members, or executive directors. Honestly, this stuff is confusing so let’s start crawling before we run. Directors and officers are held to standards, those standards are duties of diligence, loyalty, and obedience. The duty of diligence is taking in as much information as possible before making large decisions. Like the girl who broke your heart in high school, performing your due diligence can keep you from singing “Blue Eyes Crying in the Rain” at 2 AM. Breaching the duty of diligence is usually embracing negligence repeatedly. Next is the duty of loyalty, the directors and officers must be loyal to the interest of the firms rather than themselves. Famous example: British Airways and Virgin Atlantic airlines fixed the prices of plane tickets, making the cost of travel wildly expensive for the consumer while unethically benefitting the company’s pockets rather than the consumer. But if you like the girlfriend analogy, she cheated on you and left you in the dirt (in the twilight glow I see…). Lastly, the duty of obedience, directors and officers are held to regulations both by US law and the bylaws of the employer. When those statutes are allegedly violated by the directors or officers, lawsuits may arise. Some examples of this may be the hiring or firing based on racial discrimination, breach of employment contract, or failure to address safety concerns. When these duties are breached or allegedly breached, the D&O coverage can help cover the costs of lawsuits, misappropriation of funds, or other direct losses due to those violations.
Non-Profit Example of a Claim
The board of directors of an animal shelter was recently sued by several of their long-time donors. While these members have been involved with the nonprofit for years, they felt the shelter was being careless with their funds. As a result, the donors demanded that they be repaid all the money they gave to the shelter. The shelter faced three separate lawsuits on this charge and defense costs exceeded $400,000. Nonprofits rely heavily on the donations and support of others. And while you may think that donations are simply gifts, they can lead to serious litigation risks in the face of misappropriation of funds or other alleged wrongdoings. If the animal shelter was held liable for negligent financial practices, then they could be on the hook for paying that $400,000. Or you could wisely have that covered by D&O policy coverage.
For-Profit Example of a Claim
Let’s say me and you are in insurance business together (good job finding such a charming partner) and let’s also say our client, large construction company, was recently sued by a competing construction company. The competitor claimed our client of defaming their firm to the surrounding community causing loss of business and a tainted reputation. The competitor sought direct and consequential damages including lost profits, punitive damages, and attorney fees. Our client was taken to court being faced with paying $530,000 for the alleged defamation. Since this is an alleged wrongful act on behalf of the directors and officers information tainting the reputation of the competitor, the D&O coverage could cover the costs of the lost profits, punitive damages, and attorney fees. We hope these directors and officers aren’t spreading bad news around town like that cheating girlfriend of yours, but a slip of the tongue can cause massive repercussions that firms don’t want to be stuck with. Thankfully, D&O insurance provides coverage for alleged or actual wrongful acts, which helps organizations respond to various types of litigation.
