Directors Liability Insurance and Concerns Over Wrongful Acts

Directors and officers (D&O) insurance is often purchased by individuals that sit on a number of board of directors and therefore face exposure to lawsuits. Sometimes referred to as directors liability insurance, because directors can be personally sued by a number of people with whom they do business or come in contact with during the performance of their duties, including shareholders, creditors, employees, suppliers, customers, competitors or regulators.

The suits can be bought about for a variety of reasons. Shareholders might sue for insider trading. Creditors might sue over allegations of misrepresenting the financial health of the company. Competitors have been known to sue for anti-trust or unfair trade practices. Basically, a suit can be due to anything construed as a “wrongful act”. Wrongful acts include errors and omissions, as well as misstatements, misleading statements, neglect or breach of duty. Beneficiaries are the directors, officers or the corporation itself.

Lawsuits can seriously affect a director’s ability to govern

Being personally involved in a lawsuit can have a crippling effect on individual directors. Simply fearing the risk of a lawsuit might very well cause qualified individuals to decide against taking director positions, and it could also motivate existing directors to act with excessive caution in pursuing a corporation’s interests.

This obviously does not bode well for these corporations, which is why insuring directors, or officers, against personal liability for their own wrongful acts helps to address these types of concerns.

D&O insurance policies cover claims made during the policy period. It doesn’t matter when the wrongful acts occurred. A claim arising from a lawsuit filed this year for a wrongful act committed last year is covered by this year’s policy.

Most policies have an exclusion against one insured suing another. Another standard exclusion is for a failure to maintain adequate insurance. If, for example, a corporation’s headquarters were to be destroyed by a fire, and one of its directors had let the property insurance lapse, the corporation cannot file a claim under its D&O insurance policy.

Don’t let these concerns make a difficult job even harder. Protect yourself, or your directors, with a directors liability insurance policy. Speak to a qualified agent today.