The Legal Benefits of Directors & Officers Liability
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In today's legal environment, Directors & Officers (D&O) Liability coverage is an integral part of managing a business. Directors and officers of professional service firms have a legal responsibility to shareholders, creditors, investors, client companies, employees and others for their management decisions. These decisions include those of financial performance, contract dispute, misappropriation of retirement funds, mishandling of workers’ compensation payroll contributions, hiring and firing, corporate policies, benefits plans, discrimination and sexual harassment just to name a few. Breach or mismanagement of any of these obligations can incur personal liability to the individual director or officer involved, as well as to the firm itself.
D&O insurance protects your firm against claims alleging financial loss arising from mismanagement of the company. Coverage typically extends to three areas:
- Coverage for individual directors and officers
- Reimbursement coverage to the company for a contractual obligation to indemnify directors and officers that serve on the board
- Protection for the company itself
Often times, Directors & Officers Liability is thought to be a coverage only necessary for publicly traded companies, but that couldn’t be further from the truth. Private companies still face many of the same risks. Business decisions made by directors and officers can quickly impact the finances and operations of any company. The cost of defending corporate lawsuits can be costly, and fines and penalties are increasing, sometimes exceeding the net worth of small private businesses.
Do your by-laws indemnify the directors and officers of your organization? Many board members won’t accept the position without knowing they have indemnification protection. D&O coverage protects the company’s balance sheet when there’s an obligation to defend an individual director or officer.
Severability of insureds is a clause stating that knowledge of material or false statements made by one insured will not be imputed to other insured(s). For example, if one officer was aware that a coverage application contained false financial data, this knowledge which would ordinarily bar coverage will not be attributed to any other directors and officers who were unaware. Most D&O insurers offer varying levels of severability protection within their policies with the broadest being that of full severability.
Another way to think of Directors & Officers insurance is that of an Errors & Omissions policy for your management responsibilities. If you’re a member of the board, your duties and responsibilities are ever- increasing and you can be held personally liable for a misstep. Protect yourself by requiring this coverage from your employer, or ensure you offer it to your employees.
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