Directors and Officers insurance (D&O) protects individual corporate directors and officers in the event they are personally sued by investors, employees, vendors, competitors, and customers, among other parties. Directors take on a huge responsibility and are prone to being named in lawsuits for a variety of reasons related to their position in the company. Directors insurance protects them by covering legal fees, settlements, and other costs; in addition, the coverage sometimes can extend to protect the company if it is named in a suit as well.
In many instances, when a company appoints directors or hires new officers those hired will require D&O coverage as a condition of serving (or employment) because they don’t want to put their personal assets at stake. In addition, outside investors (such as venture capitalists or other financiers) will also require D&O policies before providing funding to a business, mainly because they see having this coverage in place as a way to protect their own investment.
Reasons why directors are named in a lawsuit
Directors, as well as officers, are sued for a variety of reasons connected with their company positions. This can result in severe cases of stress and anxiety, which certainly is not good for any business. Among the reasons for bringing suit against a director:
- Misuse of company funds
- Misrepresentation of company assets
- Failure to comply with workplace laws, and
- Lack of corporate governance, among other issues
It’s important to note that a business doesn’t have to have shareholders in order for its directors and/or officers to be personally sued. Any company or organization having relationships with vendors or customers, or intending to seek venture capital funding or other financial investors, should realize that these are the types of external exposures for which small business executives can be held accountable. Any business, large or small, will usually have directors who are likely to become targeted by litigants over their management of the company’s affairs.
While some small business executives believe that their general liability or umbrella business insurance policies will cover claims involving directors and officers, this is not the case. Those general liability or umbrella policies don’t respond to management liability lawsuits, which is why directors insurance is so often vital to have in place.