Directors and Officers 101
31 May 2017
Directors and Officers (D&O) insurance is liability insurance for the protection of directors and officers of a business, company or organization, or the actual organization itself. This may be due to a lawsuit taken against the company or those responsible for it, resulting in an expensive court case or damages.
Directors and Officers are the heads of a business operation, one of the highest-ranking executive positions in an organization, who are responsible for the running of it. Other titles used for the heads of a company include manager, director, MD (managing director), founder, leader, governance professional, CEO (chief executive officer), COO (chief operating officer), president, senior or team leader. Types of business operation managed by such a person may include a proprietorship, directive, corporation, limited liability company (LLC), cooperative, franchise, private limited company, public limited company, non-profit/not for profit organisation or sole trader.
All operations are responsible for their business assets, stock, shares, business premises, offices, staff, clients and customers.
A business can provide any professional service such as finance, construction, retail, manufacturing, hospitality, real estate, consultancy firms, information technology service providers, legal firms, car dealerships, transportation, health and wellness operations or tourism services, to name but a few.
Corporate governance is evolving at a rapid pace. Organizations are seeing a significant increase in governance requirements related to disclosure, the scope and timing of communication to shareholders and other stakeholders, and increased audit requirements. At the same time, litigation trends are on the rise, increasing board members exposure to legal and financial risk. Securities class action lawsuits, breach of contract, wrongful termination, and discrimination lawsuits are just some examples of claims that could expose directors and officers to litigation – and potentially their personal assets. What directors and officers must ask themselves is what’s standing between their personal assets and litigation? Directors should generally be protected by way of indemnity agreements in their corporate bylaws. That’s the first line of defense. But, what happens if indemnification from their company becomes unavailable, either because of a corporate insolvency or a court order prohibiting the company from indemnifying? If such a situation arises, there is no longer a corporate balance sheet standing in the wing to protect them, and leaves directors personally liable to cover their losses. The Directors and Officers insurance policy is the second line of defense. Not only does it provide protection for directors beyond corporate indemnification, it also provides protection for directors from instances where no indemnification is provided or available. The D&O policy is critical because it’s generally the last line of defense shielding personal wealth. If the courts deem directors personally liable, absent of a D&O policy or corporate indemnification, they can go after every single asset that those directors hold in their name. It could be a house, retirement funds, cash account or stocks which could ultimately wipe out an individual’s personal wealth.
Negligent acts can include situations such as selling a faulty, defective or broken product, failure to provide a ‘duty of care’ to staff, failure to use reasonable care that causes harm to another party or incidents involving malpractice.
Being responsible for such a large amount of people and operations leaves a lot of room for problems and issues. Running a business, large or small, can be very complicated as an employer has to be responsible for an employee’s welfare. Taking out Employers’ Liability or a General Liability cover ensures that the day to day operations of staffing a company are taken care of. Health and safety is paramount in the workplace and any accidents or injuries that occur on the business premises are largely the responsibility of the employer. Anything from slips and trips, heavy lifting, electrical faults, cuts, screen glare or bad posture in chairs, an employer has to ensure that the safety and wellbeing of their employees is adhered to at all times. In extreme cases this also extends to permanent disability/paralysis, dismemberment or death if occurred on the work premises. Corporate travel may also be considered as the employer’s responsibility if an employee is required to travel abroad as part of their duties and suffers from an accident, illness or injury. The employer is also accountable for the conduct of other employees in the company as well as from the directors and officers themselves. Harassment or discrimination based on gender, sexuality, race, disability, religion or any other prejudice is sufficient grounds for a lawsuit and is normally aimed at the employer as either the cause or as the body responsible for allowing such an incident to happen.
Errors and Omissions (E&O) deal with claims of negligence, carelessness and mishandling by the company. This can be covered under Professional Liability or as Professional Indemnity. In such cases of oversights, companies need to be covered for large payouts to cover defence costs, legal fees, court costs, reimbursements and damages. When claims are made against a company, sufficient cover will take care of the financial loss incurred as well as providing funds towards restoring a company’s reputation. Bad press, slander, defamation and blackmail can destroy a company’s reputation, potentially resulting in a loss of earnings. More money will need to be spent to restore attitudes and opinions of a company from client’s customers and the general public.
Directors and Officers are the heads of a business operation, one of the highest-ranking executive positions in an organization, who are responsible for the running of it. Other titles used for the heads of a company include manager, director, MD (managing director), founder, leader, governance professional, CEO (chief executive officer), COO (chief operating officer), president, senior or team leader. Types of business operation managed by such a person may include a proprietorship, directive, corporation, limited liability company (LLC), cooperative, franchise, private limited company, public limited company, non-profit/not for profit organisation or sole trader.
All operations are responsible for their business assets, stock, shares, business premises, offices, staff, clients and customers.
A business can provide any professional service such as finance, construction, retail, manufacturing, hospitality, real estate, consultancy firms, information technology service providers, legal firms, car dealerships, transportation, health and wellness operations or tourism services, to name but a few.
Corporate governance is evolving at a rapid pace. Organizations are seeing a significant increase in governance requirements related to disclosure, the scope and timing of communication to shareholders and other stakeholders, and increased audit requirements. At the same time, litigation trends are on the rise, increasing board members exposure to legal and financial risk. Securities class action lawsuits, breach of contract, wrongful termination, and discrimination lawsuits are just some examples of claims that could expose directors and officers to litigation – and potentially their personal assets. What directors and officers must ask themselves is what’s standing between their personal assets and litigation? Directors should generally be protected by way of indemnity agreements in their corporate bylaws. That’s the first line of defense. But, what happens if indemnification from their company becomes unavailable, either because of a corporate insolvency or a court order prohibiting the company from indemnifying? If such a situation arises, there is no longer a corporate balance sheet standing in the wing to protect them, and leaves directors personally liable to cover their losses. The Directors and Officers insurance policy is the second line of defense. Not only does it provide protection for directors beyond corporate indemnification, it also provides protection for directors from instances where no indemnification is provided or available. The D&O policy is critical because it’s generally the last line of defense shielding personal wealth. If the courts deem directors personally liable, absent of a D&O policy or corporate indemnification, they can go after every single asset that those directors hold in their name. It could be a house, retirement funds, cash account or stocks which could ultimately wipe out an individual’s personal wealth.
Negligent acts can include situations such as selling a faulty, defective or broken product, failure to provide a ‘duty of care’ to staff, failure to use reasonable care that causes harm to another party or incidents involving malpractice.
Being responsible for such a large amount of people and operations leaves a lot of room for problems and issues. Running a business, large or small, can be very complicated as an employer has to be responsible for an employee’s welfare. Taking out Employers’ Liability or a General Liability cover ensures that the day to day operations of staffing a company are taken care of. Health and safety is paramount in the workplace and any accidents or injuries that occur on the business premises are largely the responsibility of the employer. Anything from slips and trips, heavy lifting, electrical faults, cuts, screen glare or bad posture in chairs, an employer has to ensure that the safety and wellbeing of their employees is adhered to at all times. In extreme cases this also extends to permanent disability/paralysis, dismemberment or death if occurred on the work premises. Corporate travel may also be considered as the employer’s responsibility if an employee is required to travel abroad as part of their duties and suffers from an accident, illness or injury. The employer is also accountable for the conduct of other employees in the company as well as from the directors and officers themselves. Harassment or discrimination based on gender, sexuality, race, disability, religion or any other prejudice is sufficient grounds for a lawsuit and is normally aimed at the employer as either the cause or as the body responsible for allowing such an incident to happen.
Errors and Omissions (E&O) deal with claims of negligence, carelessness and mishandling by the company. This can be covered under Professional Liability or as Professional Indemnity. In such cases of oversights, companies need to be covered for large payouts to cover defence costs, legal fees, court costs, reimbursements and damages. When claims are made against a company, sufficient cover will take care of the financial loss incurred as well as providing funds towards restoring a company’s reputation. Bad press, slander, defamation and blackmail can destroy a company’s reputation, potentially resulting in a loss of earnings. More money will need to be spent to restore attitudes and opinions of a company from client’s customers and the general public.