While serving on a board of directors or as an officer, business professionals face a wide range of risks. Just one mistake could result in a costly lawsuit that puts both the professional and business in danger of financial ruin. Directors and officers (D&O) liability insurance is a specialized type of insurance that covers directors and officers against claims made against them while performing their job duties.
What Is D&O Insurance?
Business insurance policies provide coverage for a business itself. However, who protects the individual company’s directors and officers? These professionals face personal exposure to financial losses that can result from a lawsuit. Businesses that wish to protect their company’s leaders often rely on D&O insurance.
There are several elements to a D&O insurance policy. First, D&O coverage protects a business’s directors and officers when a company is unable to indemnify the individuals. Next, the policy reimburses the business when it indemnifies the individuals. Finally, a policy can eliminate disputes of coverage allocation when both the business’s professionals and insured organization are named as co-defendants in the lawsuit.
Fiduciary Duty Mismanagement
There are three main fiduciary duties that are owed by directors and officers, including care, loyalty and good faith. Directors and officers owe these fiduciary duties to the corporation, as well as its shareholders. When there is a breach of fiduciary duty, a lawsuit may be filed that can result in possible financial losses or bankruptcy. D&O insurance policies can help protect business professionals from claims involving fiduciary duty mismanagement and the legal liability that can arise out of their role as fiduciaries.
Violating Laws or Regulations
Directors and officers are under certain obligations to comply with state and federal laws and regulations. Failure to adhere to these laws and regulations can result in legal claims against your business. In some cases, directors and officers may face lawsuits resulting from a lack of, or poor corporate governance. This can result if a business fails to oversee their business leaders or when a business displays signs of negligence when its leaders are knowingly violating rules. As nearly all businesses in every industry must comply with certain laws and regulations, all companies can benefit from acquiring D&O insurance. Businesses that do not purchase coverage risk sustaining serious losses.
Employment Discrimination Suits
Directors and officers liability claims generally come from clients, stockholders or employees. As a director or officer can be held personally responsible for certain acts of a company, these business professionals require insurance protection to prevent putting their personal assets at stake. Employment discrimination suits are one of the most common lawsuits that D&O insurance covers. D&O policies typically cover any type of employment-related charge relating to the discrimination of an employee. This may include an employee’s age, gender, race, religion, disability, skin color or national origin. An employee can also sue for unethical HR management relating to discrimination.
Shareholder and Stock Suits
Shareholders who are unsatisfied with company or stock performance may decide to file a lawsuit. Suits brought by private shareholders, investors, bondholders or other lenders can result in substantial losses. Lawsuits can include inadequate service, misrepresentation or inaccurate disclosure of financial reports or placement materials. As stakeholders do not always have direct access to a private company’s financial data, they rely heavily on the statements and materials that are made by these private companies. When shareholders discover that there were breaches of duty made with respect to various sales or transactions, shareholders may decide to sue the director or officer in charge.
Human Resources Management
Directors and officers insurance also covers human resources management claims, such as unlawful employment practices or unethical HR management. As business leaders, directors and officers can become involved in a range of employment practice cases. Some of the most frequent HR claims include wrongful termination, sexual harassment, discrimination and retaliation. Claims can also occur when there is inappropriate workplace conduct that takes place, such as an invasion of privacy, defamation, negligent evaluation, and deprivation of a career opportunity. D&O insurance can help cover the financial repercussions that can arise when a director or officer is sued due to an HR management-related incident.
Learn More from BenefitCorp
Most people believe that D&O insurance is limited to just liability coverage when a board director or officer makes a mistake when performing his or her official duties. However, D&O coverage offers more than that alone. New securities laws and regulations require even stricter disclosures, transparency and communication to both shareholders and the public. It can be challenging for businesses to remain in compliance. To prevent an even higher degree of personal liability, most directors and officers expect to be protected with D&O insurance. For more information about what directors and officers insurance covers or to acquire a policy for your business, reach out to BenefitCorp.