Directors and Officers Insurance
Posted by Dr. Earl R. Smith II in Governance, tags: advisor, advisory board, board of directors, CEO, chairman, coaching, consulting, director, Executive Coaching, Governance, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, Life Coaching, management assessment, non-profit, nonprofit, Personal Growth, spirituality, turnaround, Turnaround ManagementBy Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com
Errors and Omissions insurance has been popular since the 1960’s and covers mistakes, wrongful acts, acts of negligence on the part of a company with respect to products and services and extends to contractors performing services on behalf of the policyholder as well. Boards of directors and corporate officers and management have a duty to protect the company against lawsuits, frivolous and otherwise. Errors and Omissions insurance is a prudent measure. However, with the explosion in lawsuits against companies, especially in the era of mega awards by juries, additional measures are needed to protect board members.
An additional layer of insurance is Directors and Officers insurance. Directors and Officers have a duty to follow the ‘prudent person rule’. This rule refers to all matters of corporate governance but is especially pertinent to a director’s fiduciary responsibility. Directors are held to a high standard regarding making informed decisions and acting in good faith and in the best interest of the company and its stockholders.
Directors and Officers have a responsibility to perform their duties within the corporate charter/by-laws and act in accordance with all laws, statutes and regulations, such as the Sarbanes-Oxley Act of 2002. Good governance also entails strict loyalty to the company that includes furthering the interest of the company without furthering personal interest and refraining from personal actions or affiliations which might damage the company or its reputation.
Directors failing to uphold their obligation to the company may incur personal liability for their conduct. Other directors may also incur liability because of the action on one director - particularly directors who knew of the conduct or should have known of the conduct but did nothing to stop it. The individual director failing to uphold their responsibility could even extend the liability to the corporation or entity itself. Over 75% of lawsuits against companies now also name sitting and past directors as defendants.
Allegations often revolve around decisions perceived to have lowered shareholder value, compromised a competitive advantage, or a failure to take full advantage of a significant market opportunity. Directors and Officers were once covered by the unwritten rule regarding the exercise of good business judgment. Unless a plaintiff could demonstrate an Officer or Director acted with malice and in a manner which directly benefited them personally, few Officers or Directors were personally named in lawsuits. Today, that is not the case. Officers and Directors are routinely hauled into to court to account to explain and defend their decisions.
Directors and Officers insurance policies usually cover the performance and duties of management as well. D&O insurance usually include coverage’s for employment practices liability and fiduciary liability. Employment practices liability is usually where most cases originate. Employment practice suits stem from a variety of situations such as:
- Alleged wrongful termination
- Different forms of harassment
- Family Medical Leave Act violations
- Pay practices
Directors and Officers Insurance should be in place when a board is assembled. Many directors require the insurance prior to agreeing to serve as an officer or director. Directors have become wary at the number and size of suits against boards and the prevalence of individual directors named in these suits. Even when the charges are frivolous and dismissed, the time and energy expended fighting the suits is draining and the fight itself can bankrupt a small company or director. Directors may strongly believe in the company and its mission, but they should not be asked to risk personal assets to serve on the board.
Related Articles:
- Errors and Omissions Insurance - Necessary Protection of Officers and Directors
- Governance and Risk Management Strategic Plans
- Corporate Risk Management
- Corporate Ethics and Compliance - Board Responsibilities
- Corporate Board Dangers
- Board of Directors - Major Legal and Moral Responsibilities
- Lessons of Complacent Boards
Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development - a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living - a book of Raven Tales and exploration.
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