Directors and officers liability insurance coverage, also called D & O insurance, protects the executive level leaders of your organization in the event of a liability claim. This insurance is similar to errors and omissions insurance, but at the executive level.
Rather than protecting you from performance (operations) related claims, D & O insurance covers the executives and the organization itself against claims pertaining to shareholders complaints and wrongful acts claims.
If your business has a board of directors, you may be required by the board to carry this insurance coverage. Almost any sizeable organization carries directors and officers insurance, whether or not it is required by their board of directors
Some Claim Scenarios
Courtesy of Philadelphia Insurance Companies
Breach of Duty of Care
Disgruntled shareholders of a technology company filed suit which sought the removal of the directors & officers from their positions on the board for misconduct and breach of duty. Allegations included embezzlement, coercion, theft, and conspiracy to convert the business assets for their own benefit. The defense cost exceeded $300,000.
The plaintiff filed a complaint against their competitor alleging that a former employee, now working for the competition, engaged in unauthorized use of confidential and proprietary information and committed other acts of unfair competition. As a result, the plaintiff alleges it has suffered irreparable and immediate injury. In addition, the plaintiff alleges that the defendant has possession of its confidential information and intellectual property.
The plaintiff asserts causes of action for misappropriation of trade secrets, confidential information and unfair competition. Total defense costs and settlement exceeded $450,000.
Failure to Disclose
A manufacturing company received a complaint from an investor who alleges the company improperly induced the plaintiff to issue a note payable to the company. The plaintiff specifically alleges the company made false representations and other false statements regarding the company’s forecasted rate of growth and failure to disclose its tax lien. The company defaulted on the promissory note when it failed to make the required principle and interest payments. The plaintiffs issued a demand letter and filed suit against the company. The plaintiff agreed to accept the company’s offer to convert the promissory note to stock in the company, but the defense costs exceeded $100,000.
Allegations by unsecured creditors state that the board of directors depleted the company assets by paying dividends and salaries to the director & officers prior to the sale of a company that was financially insolvent. The insurance proceeds paid out over $1M.
Failure of Due Diligence
An investment firm purchased a hotel from a privately held company. The investment firm re-sold the hotel quickly for a much higher price; shareholders of the private company sued, alleging that the board of directors did not do their due diligence in the original sale.
While once only large and publicly traded companies were candidates for D & O actions, with the advent of a very aggressive plaintiffs bar, this coverage should be considered by every business.