	Terrorism Ins. Arrives
	D&O Market Overview
	Market Hardening
	Director Liability 3 Basics

Wednesday, May 14, 2008


Management

Company History

Business Insurance

Life and Health

Personal Insurance

Specialty Insurance

Newsletters

Obtain a Quote

Gaston Capabilities

Contact Us

Directors & Officers Liability Insurance

What is Directors & Officers Liability Insurance?

Directors & Officers Liability Insurance provides financial protection for the directors and officers of your company in the event they are sued in conjunction with the performance of their duties as they relate to the company. Think of Directors & Officers Liability Insurance as a management Errors and Omissions policy.

Directors & Officers Liability Insurance can usually include Employment Practices Liability and sometimes Fiduciary Liability. The former involves harassment and discrimination suits, and is where the majority of your exposure will be.

Directors & Officers Liability Insurance is often confused with Errors & Omissions Liability. The two are not synonymous; Errors & Omissions is concerned with performance failures and negligence with respect to your products and services, not the performance and duties of management. Generally it is a good idea to carry both policies.

When do I need Directors & Officers Liability Insurance?

When you assemble a board of directors, they will frequently make the requirement. Investors, especially Venture Capitalists, will also usually require that you show evidence of Directors & Officers Liability Insurance as part of the conditions of funding your company.

Also having employees opens management up to employment practices lawsuits.

Why do I need Directors & Officers Liability Insurance?

First, claims from stockholders, employees, and clients will be made against the company, AND against the directors of the company. Since a director can be held personally responsible for acts of the company, most directors and officers will demand to be protected rather than put their personal assets at stake.

Second, investors and members of your board of directors will not be willing to risk their personal assets to serve as a corporate director or officer, no matter how heartfelt their belief in your company.

Last, employment practices suits constitute the single largest area of claim activity under D&O policies. Over 50% of D&O (directors and officers) claims are employment practices related.

Directors and Officers can be held personally liable for the decisions they make

Yes, as leaders of a private company, directors and officers can be held personally liable for the decisions they make. Is your company’s board of directors comfortable with their level of personal risk?

Being private does not mean that the decisions of your board are immune from public scrutiny. Shareholders, employees, customers, suppliers, competitors and even the government may bring an action against your private company and its board. A corporate shield and broad by-laws offer board members and employees some protection. Unfortunately, in many cases, it is not adequate.

Typical lawsuits against directors and officers include allegations of:

Mismanagement of operations or company assets
Self-dealing and conflicts of interest
Misrepresentation during the sale of company assets
Misrepresentation in a private placement prospectus
Acts beyond authority granted in by-laws
Violation of certain state and federal laws
Breach of fiduciary duties

Each of these types of litigation can last several years, becoming a financial burden and a continuous drain to a private company’s profit margin. Indemnification from the company is a protection for its directors, officers and employees, but, sometimes it’s not enough. If a company cannot indemnify its directors, officers or employees, either because of the allegations of a lawsuit or as a result of the company’s insolvency, then this financial burden can become the personal responsibility of the company’s directors, officers or employees.

To help protect the directors, officers and employees of private companies, the Gaston Insurance Group offers Directors & Officers Liability Insurance coverage. An optional entity liability coverage is also available, offering additional protection for the company itself, should it be named with its board or on a stand alone basis.