Are you a board member for a non-profit or business? Pending litigation involving Richmond based Health Diagnostic Laboratory Inc illustrates the importance of Directors and Officers Liability insurance (D&O Insurance). Some of the directors and officers of HDL who are facing potential lawsuits will be able to access proceeds from a $10 million insurance policy to help pay their legal fees.
What is D&O Insurance?
Anyone who serves on the Board of Directors is a possible target for a variety of lawsuits and complaints about their conduct – particularly if the public or if plaintiff’s attorneys perceive them to have “deep pockets.”
This can lead to devastating consequences for board members and directors who are unprepared: While corporations typically protect stockholders against personal liability arising from claims against the corporation, board members can be and are held personally liable for the consequences of their behavior as directors, both intended and unintended. Examples of common claims against directors include, but are not limited to:
- Violations of fiduciary duty to stockholders
- Failure to provide services
- Failure to disclose conflicts of interest
- Discrimination claims
- Mismanagement of company or organization assets
… and much more.
Even where claims are unfounded, directors often find the costs of mounting a defense to be a significant burden on their personal finances, running to hundreds of thousands of dollars in some cases. On average, these lawsuits cost defendants over $308,000 each. Most board members don’t even know where to find the best attorneys for their own defense.
History of Directors and Officers Insurance
D&O insurance was first sold by Lloyd’s in the 1960s, though it didn’t become popular until the 1980s, when plaintiff’s lawyers made a cottage industry of targeting board members involved in a slew of mergers and acquisitions that had been occurring over the previous decade.
Basic Structures
Today, the there are three basic kinds of D&O coverage on the market. The variety you want depends on the structure of your organization, your role in it, and the management and other liability coverages already in place.
- Side-A. This kind of policy covers directors and officers who are not indemnified by the corporation. Essentially, this is individual coverage.
- Side B. This coverage protects a corporation when it indemnifies directors and board members. Under this structure, the company agrees to take on the risk normally borne by individuals on the board, and then protects itself against that risk by purchasing Side B. coverage.
- Side C. This kind of policy covers claims brought specifically under securities laws. It would be appropriate only for publicly-traded companies and some very large privately held companies. Smaller companies may wish to purchase “entity coverage” which provides somewhat broader protections.
Individual board members can also purchase a Broad Form Side A DIC (Difference in Conditions) policy, to supplement any Side A coverage in place, and to fill the gaps in coverage already in place between Side A and B.
If you own or are on the Board of a corporation, D&O insurance is a must. Just finding the right attorney can be a daunting challenge to those who aren’t experts in director liability litigation. With D&O insurance in place, you can limit your liability and risk with just a small premium.
D&O Carriers are experienced at managing and limiting claims – frequently protecting your professional reputation at the same time.
Application
In the United States, D&O insurance is generally purchased by the corporation to protect both itself and its directors and officers, rather than as an individual purchase by the directors themselves. Corporations do this in order to ensure that they are attracting the most qualified people to serve in these crucial positions. Many top professionals in most industries would not agree to serve on a Board of Directors or as a corporate officer unless the corporation agreed to put this protection in place.
Claims-Made vs. Occurrence Provisions
One of the central provisions that differentiate policies is whether the policy will provide protection for claims made for actions or omissions that began before coverage was in place. For example, a board member commits a tort, allegedly, in 2013. In 2014 the company switches D&O coverage or initiates coverage. In 2015 the tort is discovered and someone sues the director or directors, or the officers or both. A claims-made policy provides protection if the lawsuit is filed while coverage is in place. An occurrence policy pays benefits based on when the accident or omission leading to the lawsuit took place. The kind of policy that is best for you depends on the structure and type of coverage that was in place before.
Additionally, you may want to purchase an extended reporting period, or ERP, to keep coverage in place after a policy is cancelled. This provides coverage for events that may have already taken place, but for which no lawsuit has yet been filed.
The transition from one type of carrier to another is often tricky, and some important coverage decisions need to be made. Your agent should be able to walk you through how to coordinate current and prior coverages to avoid gaps in protection.
Exclusion of Criminal Acts
D&O insurance is very closely related to errors and omissions insurance, which is often purchased by professionals such as attorneys, financial advisors, accountants and other white collar, licensed individuals. As such, it does not cover intentional criminal acts, such as embezzling or fraud. Generally, however, policies do cover other acts considered “wrongful” including misstatements or omissions made while working on behalf of the organization. Look carefully at covered acts and exclusions while shopping for policies: The best deal isn’t always the one with the lowest premiums.
Contact The Andrew Agency
The Andrew Agency is an independent insurance agency serving client in VA, MD, NC and SC. If you have questions about D&O Insurance, Liability or any other type of insurance contact The Andrew Agency at 804.320.2886.
