Why Companies Purchase Director and Officer Insurance Coverage

D&O is written to:

• Protect the personal assets of a company’s directors and officers;
• Protect the company’s assets;
• Provide reimbursement to the organization to indemnify D&O’s for their losses; and
• Help the company monitor and provide defense costs associated with responding to lawsuits and investigations.

Why Private Companies Should Consider Buying D&O Liability Coverage?

• Cost of defending corporate lawsuits may exceed the net worth of most private companies;
• Judgments can be financially crippling;
• Corporate indemnification may not be available;
• Adverse shareholders and other potential claimants may exist;
• Bad business decisions are likely to be more visible due to small business environment thus attracting the
• attention of shareholders, regulators and others;
• Business decisions made by D&O’s can quickly impact the finances and operations of a company;
• D&O’s work in demanding environments as they cover more corporate duties;
• Unique conflicts of interest may exist due to complexity of responsibilities; and
• Companies will have a difficult time attracting qualified individuals to their Boards without D&O
• coverage.

Current Business Trends Point to Purchasing D&O

• Coverage
• Economic uncertainty;
• Access to adequate capital;
• Keeping up with technology;
• Internet growth;
• Protecting intellectual property assets; and retaining qualified workers.

How Directors & Officers Liability Insurance Safeguarding Companies and Their Leaders from Financial Disruption

No matter how groundless the charges, or how “airtight your defense, D&O litigation can be distracting and financially disruptive for the directors and officers involved – as well as for the private company itself. In a D&O lawsuit, the named directors and officers can be held personally liable for the damages claimed.

Even if corporate bylaws and state statutes provide for the indemnification of a company’s directors and officers, D&O litigation may come at a time when the company cannot afford a drain on both cash and human resources. And, in certain situations, indemnification is not permitted by law regardless of a company’s ability to pay for the claim.

Directors & Officers Liability provides coverage for settlements, judgments and defense costs arising out of the wrongful acts of the directors and officers. It reimburses the private company for indemnification of its directors and officers. If indemnification cannot be made, then the policy pays the directors and officers directly. Due to the catastrophic nature of D&O claims, the purchase of Directors & Officers Liability coverage is strongly recommended for all corporations, including privately-held companies.

What are the Basic Responsibilities of Directors and Officers?

Generally speaking, directors and officers of corporations must act in good faith and for the best interests of the corporation. A director is required “to use care, exercise judgment, the degree of care, the kind of judgment that one would give in similar situations to the conduct of his own affairs.”

Authorities say that directors must stay informed about the business in which the corporation is engaged and knowledgeable as to its business activities. The mere fact that a person accepts a corporate office and directorship does not necessarily transfer a full knowledge of corporate affairs.

Directors and officers have a fiduciary relationship to the corporation and its stockholders, if any, not unlike a trustee. In fact, they may be treated as “quasi-trustees;” or sometimes as agents, but are not permitted to use the trust property for their personal gain.

DIRECTORS HAVE WITH THREE BASIC DUTIES: OBEDIENCE, DILIGENCE AND LOYALTY.

Obedience

Directors should keep their activities within the corporate powers granted by charter or by-laws. If they don’t, they are usually held liable for their negligent disobedience.

Diligence

The degree of care which an ordinary prudent person would exercise under the same or similar circumstances is the standard by which a director’s or officer’s diligence is measured. Before making a decision, directors and officers must inform themselves with all information reasonably available to them. This duty requires not only reasonable behavior with respect to matters submitted for approval, but also requires reasonable inquiry and monitoring of the organization’s affairs. Although directors and officers do not insure the integrity of their subordinates or general organizational performance, they are required to implement reasonable programs to promote appropriate organizational conduct and to identify improper conduct.

Loyalty

Directors must remain loyal to the corporation by putting its needs before their personal needs. For example, they must refrain from engaging in personal activities which might injure or take advantage of the corporation. Directors and officers are prohibited by this duty from:

1. Obtaining secret profits or unfair gain through personal transactions with or on behalf of the corporation.
2. Competing with the corporation to its detriment.
3. Sizing a corporate opportunity.
4. Using material, non-public information for personal gain.

Officers Other than Directors

Generally, it doesn’t matter if a person sought to be held liable is a director, on the one hand, or is a managing officer on the other. Practically speaking, however, a “full-time” managing officer may be held to a higher level of liability than a director who has no hand in the day-to-day operations. Corporate officers may become personally liable for fraudulent violation of their fiduciary responsibilities. Insulation from potential personal liability may be ameliorated if responsibilities are performed conscientiously.

Responsibilities may include:

1. Assuring that all legal technical requirements have been met before the corporation begins business.
2. Keeping informed of the general activities of the corporation and its general business area.
3. Fully disclosing details of all transactions involving the sales of securities.
4. Refraining from self-dealing in anything relating to the corporation’s business.
5. Regularly attending directors’ meetings and making sure that records show a valid reason for absence.
6. Expressing objection with board action when in disagreement, and making sure it is in the minutes accurately.
7. Having knowledge of the duties of the office.
8. Avoiding any contract to serve personal interests or to assume any position which might bring personal interests into conflict or competition with the interests of the corporation.
9. Staying informed of the articles of incorporation, code of regulations and bylaws which relate to a director’s powers and duties.
10. Exercising utmost good faith in all dealings with and for corporation and being prepared to defend these actions.
11. Obeying all statues requiring specific duties to be performed by directors.

Conclusion

The decision to purchase Directors & Officers (D&O) coverage is a strategic move that companies, both publicly-traded and privately-held, must seriously consider. D&O insurance serves as a crucial safeguard, providing financial protection to directors and officers, as well as the company itself, against the potential fallout of litigation and claims arising from alleged wrongful acts. From groundless charges to costly legal battles, D&O coverage offers peace of mind and stability during times of crisis, allowing business leaders to focus on their core responsibilities without the looming fear of personal liability. As the corporate landscape continues to evolve, the purchase of D&O coverage stands as a prudent measure to fortify companies and empower their leadership, ensuring resilience and unwavering dedication to success in an increasingly litigious world.