In our article “D&O insurance: What you don’t know can hurt you,” we discussed the responsibilities of directors and officers and how D&O insurance works. Now let’s discuss the top sources of directors and officers (D&O) liability.
Regardless of your company’s size or mission, the legal costs associated with a D&O lawsuit can be crippling for both an organization and its leadership. To complicate matters, D&O liability can come from a variety of sources, and claims can arise without warning.
While D&O insurance provides a last line of defense for organizations and their leadership teams, the best way to protect against D&O claims is to avoid them altogether. Understanding the main sources of D&O liability can go a long way in avoiding costly legal action.
As organizations attempt to grow their market share, management teams must ensure that growth is achieved through fair business practices. If an organization’s competitors believe that they have been unfairly disadvantaged by dishonest or illegal behavior, they may seek legal recourse.
Directors and officers can be brought into legal actions for a range of wrongdoings, including the following allegations:
Also, directors and officers may be held liable for actions that are perceived as misleading or defamatory with claimants seeking damages for their alleged losses.
A management team has the responsibility of monitoring an organization’s financial position and its ability to meet debt obligations as they become due. If an organization becomes insolvent, creditors will often scrutinize the decisions of directors and officers to see if they can be held personally responsible and will sometimes pursue litigation in an attempt to recover outstanding funds.
Common allegations by creditors against directors and officers include the following:
Government and regulatory authorities monitor the environment in which organizations operate. These bodies help ensure that directors and officers and the organizations they control conduct their activities in a fair and lawful manner.
Government and regulatory bodies monitor compliance with a broad range of laws, including the following:
For directors and officers, the enforcement power held by these bodies can present a significant exposure to D&O claims. If regulators discover that wrongful conduct has occurred, they may pursue legal action against the organization and the executives involved.
Due to their financial investment, shareholders have an incentive to monitor an organization’s ongoing performance and ensure that directors and officers are acting in the organization’s best interest. With potentially large sums of money at stake, if shareholders are not pleased with an organization’s direction, they may take measures to protect their investment.
If it appears that management has breached their duties to the detriment of the capital stakeholders, shareholders may bring a claim against directors and officers themselves. If shareholders wish to bring a claim against executives, legal proceedings typically come about in one of two ways:
Direct action—In a direct action lawsuit, a shareholder or group of shareholders bring a claim against management for damages in their interests as shareholders. In this instance, shareholders are the benefactors of any financial settlement.
Derivative action—In derivative proceedings, shareholders—acting as the organization—sue the directors and officers. In this form of litigation, shareholders generally claim for damages caused to the organization, with the beneficiary of any settlement being the organization itself.
While customers dictate an organization’s success, disputes from these individuals can bankrupt a company altogether. In fact, customer disputes can lead to lawsuits against an organization, as well as their directors and officers. Commonly, lawsuits from customers relate to contractual disputes, debt collection, the costs or quality of products or services or the refusal to extend credit.
D&O insurance is a critical component of almost every organization’s risk management program. In today’s business climate, D&O insurance is no longer a necessity for just large, publicly traded companies. All organizations — regardless of their size, mission or structure — have some form of D&O exposure. Yet, despite the fact that D&O insurance has been around for decades, it remains one of the most complex and misunderstood insurance policies.
Jake has been in the insurance industry since 2004. He started his career in consulting at a global financial services corporation before beginning his brokerage career where he has managed management liability programs at global insurance brokerages for a diverse set of organizations ranging from start-ups to Fortune 500 companies.
Jake has been in the insurance industry since 2004. He started his career in consulting at a global financial services corporation before beginning his brokerage career where he has managed management liability programs at global insurance brokerages for a diverse set of organizations ranging from start-ups to Fortune 500 companies. Jake has served on several non-profit boards throughout his career and is a frequent speaker on D&O and cyber liability risks. Jake joined Associated Benefits and Risk Consulting (ABRC) in 2014 and his primary responsibilities include leading the firm’s management liability group and serving as global team lead.
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