Director Liability and Insurance Claims

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

General liability insurance coverage will not cover claims for errors and omission and neither general liability nor errors and omission policies will cover mismanagement or director misconduct. Businesses operating without any one of these types of policies are seriously under insured. Boards of directors should provide errors and omission policies as well as directors and officers policies as a protection to the stockholders of the company, as protection from personal liability for themselves and as a tool for the Succession committee to use in the recruitment of new directors to the board. Most seasoned executives insist on being covered by directors and officers policies and errors and omissions policies prior to agreeing to serve on the board. No matter how much a person believes in the company, the organization or the strategic plan, they should not be asked to risk their personal assets in service to the organization.

Executive management and directors can be held personally liable not only for their own actions but also proportionally liable for the actions of senior management of their company. Companies too are more often than not named as defendants in lawsuits. No longer are directors or senior managers able to avoid litigation by standing behind the business judgment rule.

As society becomes more litigious, executives should be more aware of the activities people are seizing upon to bring lawsuits. Businesses engage in broad activities with multiple customers, suppliers and employees – all believing their rights and issues should be protected. Listed below are some of the typical plaintiffs and the causes of their actions against directors and companies:

o Employees (the fastest growing segment of plaintiffs)

• Wrongful Termination (single most frequent claim)
• Harassment (growing with high profile cases and large judgments gaining attention)

o Defamation

• Breach of Employment Contract
• Unsafe work practices or environments
• Discrimination or failure to promote

o Customers

• Dishonesty
• Fraud
• Deceptive advertising
• Faulty product
• Failure to disclose

o Stockholders

• Inadequate/inaccurate disclosure (usually associated with corporate finance or risk)
• Dishonesty or fraud
• Financial reporting
• Fiduciary duty/gross negligence
• Stock or other public offerings
• Bid or threat by another company for takeover

o Competitors

• Defamation
• Wrongful business practice
• Copy right/patent infringement

o Activists

• Environmental rights violation
• Human rights violations (even if alleged violations were in other countries

o Government Agencies

• Environmental Protection Agency
• Securities Exchange Commission

Many of these lawsuits involve large numbers of people and are very expensive to litigate. Often companies and insurance companies choose to settle cases without going to trial. Too often suits arise from poorly written laws with little case law for a judge or attorney to use as a guide. Activist legislatures introducing new entitlement programs often set off a new round of lawsuits against companies and directors. Statistics are indicating plaintiffs are prevailing in these actions.

Although there are common plaintiffs and common suits, there are no standardized D and O policies. Each company should assign a committee to conduct an assessment of its operations and to seek and adviser with experience in business insurance. The committee should recommend to the full board of directors the company and the particular policy coverage available. Directors should also understand the policy exclusions the particular policies have. The following are some of the common exclusion:

• Discharge of pollutants
• Bodily injury or property damage
• Sabotage on behalf of another company
• Acts committed before policy covered a particular director
• Deliberate fraudulent, dishonest or criminal acts

Directors and Officers insurance not only protects the officers and directors of the company it protects the company and the company’s ability to attract qualified directors and officers.

© Dr. Earl R. Smith II

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Related Articles:

• Non-Profits – Director and Officer Insurance
• Directors and Officers Insurance
• Errors and Omissions Insurance – Necessary Protection of Officers and Directors
• Governance and Risk Management Strategic Plans
• Corporate Risk Management
• Corporate Board Dangers

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