Directors and Officers Coverage
If your business is incorporated, does it have a board of directors and corporate officers? Do you serve on a board of directors? If the answer is yes to either question, you could be exposed to lawsuits from shareholders. They may sue you, alleging that you committed acts that reduced the corporation’s value. Lawsuits may also arise out of employee practices, allegations of conflicting interests and from providing information to the investing public.
Decisions made by directors and officers impact the viability and value of a corporation. Issues of accounting practices, financial reporting and the use of corporate assets commonly create lawsuits filings against executive boards. Directors and Officers (D&O) coverage should be considered a necessity for corporate entities. D&O coverage supplements the protection provided by General Liability policies since the former responds to legal actions filed by shareholders, customers, scorned merger partners, and creditors.
Corporate directors must take steps to determine whether D&O coverage exists. If D&O coverage is in place, boards should also determine the amount of coverage available for handling defense costs. Any amounts paid for legal costs are subtracted from the overall policy limits and are not a separate coverage. Criminal acts are not covered by D&O Insurance. However, the cost of providing a legal defense until the status of a given act is determined may be covered. In the past it was common for a director facing a lawsuit to have any related expenses handled by a corporation’s operating funds. Today such agreements have little value, especially for operations facing bankruptcy or those that cease operation.
The increase in shareholder lawsuits has created a much tighter market for this coverage. Today, corporations needing the protection must be willing to provide detailed financial and operating information to D&O insurers. This information is mandatory and businesses should not let their concern over protecting such data be a barrier to securing this coverage. The stakes are too high. However, sharing information with D&O carriers creates a different situation. See part two for more information.
We talked about the need for a corporation’s board of directors to secure D&O insurance. Like any other type of insurance transaction, a business has to complete an application and this can cause problems that could affect possible coverage.
A business seeking D&O coverage has to provide comprehensive information about its operations, including details on future business plans (mergers/acquisitions), capital financing activities and involvement with professional services. Further, such applications require information on litigation (past and pending) on board members as well as on the nature of the legal disputes.
D&O coverage applies to a group of person, the executive board. However, the application is typically completed by one or two key executives. Both the applicant board and the insurance carrier rely upon the accuracy of the information provided by the persons completing the application. A problem may arise from how an insurer relies on the information. Typically, the insurer treats the information given by one or two persons as though it were received by all of the persons on the board. Insurers often either deny coverage or deny claims when there is evidence that the information is inaccurate. In other words, fraud or errors caused by an individual officer or director could eliminate coverage for all other directors and officers.
When coverage is not available or if it is denied, a director or officer may face the financial nightmare of having to handle his or her own legal expenses and costs of an award. Therefore, it is very important to take care that a D&O policy provides the anticipated protection. It is also important that a board takes steps to oversee the application process and to make sure that the provided information is accurate. Another step may to look for D&O coverage that offers separate coverage to directors and officers so innocent parties do not have their protection stripped away due to the deliberate, false actions of others.
Persons who need D&O coverage are typically key, savvy decision-makers. A smart decision would be to find an equally savvy insurance professional to arrange for this critical insurance protection.