Consider Directors and Officers Liability Insurance

In addition to standard property and liability exposures, your company also faces the threat of claims from what are sometimes referred to as “executive liability” exposures. These claims can be covered by three types of insurance: directors and officers (D&O) liability, fiduciary liability, and employment practices liability insurance.

Directors and Officers Liability Insurance

Directors and officers liability insurance is a form of errors and omissions coverage for persons who serve as officers of corporations and/or sit on corporate boards. The following allegations most frequently give rise to claims against directors and officers: wrongful termination, misstatement of financial conditions, inadequate/inaccurate financial reporting or disclosure, antitrust allegations, mismanagement of funds, and conflicts of interest.

Although they are generally less susceptible, the directors and officers of nonprofit corporations and privately held companies are also confronted with the possibility of D&O claims. Despite the absence of stockholders-the most likely plaintiffs in D & O litigation- such firms should not consider themselves immune to claims against their directors and officers. Current/former employees, customers, competitors, and government agencies are also potential plaintiffs.

Each year, the Wyatt Company, a prominent international consulting firm, conducts a survey pertaining to D&O claims and coverage. The 1995 survey revealed that the average claim payment associated with closed D&O claims was $4.62 million and the average defense costs were $967,000. In view of these figures, it may be difficult to find persons willing to serve on your cooperation’s board unless your firm maintains D&O insurance.

D&O policies actually consist of two separate parts: (1) corporate reimbursementcoverage, which reimburses your company for the loss it sustains when it must indemnify directors and officers, as required under you corporation’s by-laws or state law, and (2) directors and officers liability coverage, which covers the personal liability of directors and officers when, according to corporate bylaws or state law, your company is not required to indemnify them for their acts.

* One key point to understand is the fact that the policies do not insure the corporate entity itself. In other words, unless a lawsuit names individual directors or officers, D&O policies provide no coverage for your corporation as a separate entity. At times, suit papers will name both individuals and the corporation. Under these circumstances, an allocation of covered and uncovered damages between the corporation and the individual directors and officers must be made, a process that is often hotly contested between the insurer and the corporation.

Excerpts from International Risk Management Institute, Inc.

1/96 Reprint HealthCare Professionals Insurance Services

* Since publication of this excerpt, entity coverage has become available.