Directors’ and Officers’ Liability Insurance

Many people believe that D&O coverage is primarily for large public corporations.  Unfortunately, smaller privately-held companies may discover that just isn’t the case.  In fact, their exposure is often greater than that of a large corporation.  The cost of litigation and indemnity alone can prove crippling to smaller companies.

Consider this real-life example:  a company is considering the acquisition of another, smaller company.  After months of due diligence, the deal is dismissed for a variety of reasons.  Six months later company officers are sued, claiming that the due diligence was only a ruse to gain competitive edge.  The total settlement and defense costs ultimately exceed $500,000.

Liability can be based on the failure to fulfill one of the following three duties as an officer or director:

· The duty of care – performing duties in good faith and with professionalism for the interest of the corporation.

· The duty of loyalty – prohibiting directors and officers from using their position to further their personal or private interests.  It also requires the elimination of any conflict of interest between the individual and the company.

· The duty of obedience – performing in accordance with the law.

Because directors and officers of private companies often have their personal wealth tied up in the corporation, liability for failure to perform one of these duties often puts their assets at risk.  D&O liability insurance is unique in that it is the only insurance coverage available to provide protection for personal assets.  Indemnification agreements alone simply cannot offer that protection in many circumstances.

From Insurance Journal – West Region, April 5, 2010 issue, pp. 28-30.