Got Coverage? Liability Insurance for Directors and Officers

These are true stories:

     An officer for a company shared an idea for a new product with his brother who started a company to utilize the idea. A shareholder filed suit against the company, which resulted in a $2.5 million settlement.

     A competitor hired a sales executive away from a competing company. The competitor filed suit alleging the hiring violated its contractual relationship with the employee, which resulted in $850,000 in defense fees and a settlement.

     A retailer told a supplier that it expected business to increase so it should increase its inventory. The supplier did so, but then the retailer moved the account to another supplier. The supplier sued the retailer for breeching his promise for additional business, which resulted in a $500,000 settlement.

These suits and others types of claims would have been covered by a Directors and Officers (D & O) insurance policy. Not many people realize that general liability insurance excludes coverage for company D & O. Corporations can be sued for almost any perceived issue or mistake, and D & O can also be held liable for those issues with their personal assets subject to a judgment made in court against a corporation.

A company can be sued by anyone, regardless of its corporate structure — whether private or public. Although D & O might expect that most of the lawsuits they could face would come from shareholders, in fact, 75 percent of lawsuits against corporations come from nonshareholders.  According to the 2007 Towers and Perrin Survey, lawsuits can originate from any of the following sources:

• Shareholders: for failure of the officers to make proper decisions
• Customers: for failure to perform as promised or expected
• Buyer of Corporation: for misleading or inaccurate statements made during sale process
• Government Regulators: for failure to meet regulatory requirements
• Suppliers: for failure to meet contractual obligations
• Competition: for comments affecting market reputation

Private and public corporations and nonprofit entities should purchase D & O coverage to protect the organization from any claims that might be brought against the company. The leadership of any company should also be concerned about their own liability, as a member of the board of directors or as an officer of the company, for the liability they assume in their role as a D & O. If the corporation does provide D & O coverage, management should ensure the coverage purchased provides them with security from personal liability. The coverage should also provide reimbursement for any judgments that could be made against them in their role as directors and officers. D & O insurance will provide settlement payments for the company, and the officers as well as defense costs for any lawsuit that is filed against the directors and officers.

Directors and officers of companies, as well as the companies, can be sued for almost any type of issue or conflict. Not only are the assets of the company at risk in these lawsuits, but the personal assets of the officers can also be subject to loss. Directors and Officers insurance can be an economical and relatively easy way to protect the company and its officers and directors from these types of losses.

Western Growers Insurance Services has many markets for D & O coverage. Several of them are competitively priced for the amount of coverage they provide. If you are interested in learning more about D & O coverage and what program might be best for you, please contact Greg Nelson, (gnelson@wga.com) at (949) 885-2287.