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Directors & Officers Liability Coverage — Overview
and Current Market Trends
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Who Needs Directors and Officers Liability
Insurance?
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Liability insurance for
the errors, omissions, and other wrongful
acts of directors and officers has been available
since the early 1960’s. Since that
time, the increase in public awareness and
expectations, and the more litigious nature
of society, have resulted in a virtual explosion
of litigation against corporate managers
as well as judicial analysis of the conduct
and standards applicable to Directors & Officers.
The result is that Directors & Officers
are frequently being “second guessed” by
the courts
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Obligations
of Directors & Officers
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Essentially, Directors & Officers
are considered to have a duty of care, whereby
they follow the “prudent person rule”,
make informed decisions, perform in good
faith, and act in the best interest of the
company. They also have a duty of loyalty
that includes no furthering of personal interests
and refraining from personal action damaging
to the corporation. Finally, they have a
duty of obedience to perform duties within
the corporate charter/by-laws and act in
accordance with all laws, statutes and regulations
pertaining to their industry.
Breach of any of these obligations can
incur personal liability to the individual
Director or Officer involved as well as
an allocation of blame to the other Directors & Officers
on the board, possibly extending to the
corporation itself (80% of lawsuits now
also name the corporate entity as a defendant.)
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Common Allegations Against Directors & Officers
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Most allegations involve
decisions, acts, errors or omissions that
have lowered stock values, compromised competitive
industry position, wasted corporate assets,
or overlooked significant growth or investment
opportunities. These can result in financial
injury to stockholders, employees, investors,
and any other third party.
In the past, Directors & Officers
were somewhat protected from liability
due to the business judgment rule, particularly
in the question of duty of care. That is,
they acted in the best interest of the
company and with due care, honest and reasonable
belief, good faith and without a conflict
of interest. Today, the judgment rule has
lost much of its effect.
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Typical Plaintiffs
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According to
a 1996 survey by Watson Wyatt Company, there
are six major sources of Directors & Officers
lawsuits. Those plaintiffs, and the basis
of the suits, are listed as follows:
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Stockholders |
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Inadequate/inaccurate
disclosure |
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Dishonesty/fraud |
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Financial
reporting |
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Disappointing
financial performance |
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Fiduciary
duty/gross negligence |
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Stock or
other public offerings |
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Bid or threat
by another company for takeover |
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Employees |
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Wrongful
Termination (this is the single
most frequent claim!) |
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Harassment |
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Defamation |
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Breach of
Employment Contract |
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Customers/Clients |
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Dishonesty/Fraud |
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Other
Third Party |
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Environmental
Public Activists |
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Government
Agencies |
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EPA |
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New Threats
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| Recent laws governing employment
have opened the doors to a relatively new category
of potential adversary for Directors & Officers
- its own workforce. Laws such as the Americans
With Disabilities Act of 1990, the Civil Rights
Act of 1991, and the Family And Medical Leave
Act of 1993 have contributed to a dramatic
increase in claims involving not only wrongful
termination, but also discrimination and sexual
harassment. These laws are often poorly written
and vague, resulting in considerable time and
money expended in each case being interpreted
by the courts. Unfortunately, statistics are
indicating that plaintiffs are prevailing more
times than not. In any case, it is an expensive
road to travel for the defense. |
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Directors and Officers
Insurance
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| Ever since entry of domestic
Directors & Officers Liability Insurance
in the 1960’s, there has been a lack
of uniformity of policy terms and conditions.
There is no standard form of D&O coverage,
and at this time there are over 40 different
insurers writing D&O insurance, and over
twice that many different basic D&O policies.
Unlike many types of insurance,
where a price comparison may be made
based on similar forms of coverage,
D&O policies must be analyzed
and understood if they are to meet
the expectations of the Directors & Officers
as well as the business entity.
As much of importance in understanding
what IS covered by D&O, it is
also important to understand what
is NOT covered by D&O.
The following are common exclusions
on a D&O insurance policy:
- Arising out of the Directors,
Officers, or Company gaining in
fact any profit or advantage to
which they were not legally entitled.
- Arising out deliberate fraudulent,
dishonest, or criminal acts
- Bodily Injury or Property Damage
- Discharge of Pollutants
- Acts committed in the capacity
of Director for any Outside Entity
- Acts committed as Director of
a Subsidiary that occurred prior
to acquisition of the Subsidiary
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