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InsureCast
a division of TRT & Associates, Inc. 
Technology Insurance
Loss Scenarios for IT Firms
 

Misrepresentation
An officer of XYZ Corporation held a conversation with a potential investor in which they discussed the future plans for the company, including the launch of new products over the coming six months. Based on this information, the investor committed over $500,000 to the company.

After a year, the products the investor had anticipated did not appear in the marketplace. During this time period, the value of the original investment declined. The investor sued XYZ and its directors and officers for misrepresentation, seeking over $10 million in compensatory and punitive damages.

RESOLUTION Following two years of litigation and $250,000 in defense costs, the parties finally reached a settlement with the plaintiff for $335,000.

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Common D&O Allegations

 

Most D&O allegations involve decisions, acts, errors or omissions that have lowered stock values, compromised competitive industry position, wasted corporate assets, or overlooked significant growth or investment opportunities. These can result in financial injury to stockholders, employees, investors, and any other third party. In the past, Directors & Officers were somewhat protected from liability due to the business judgment rule, particularly in the question of duty of care. That is, they acted in the best interest of the company and with due care, honest and reasonable belief, good faith and without a conflict of interest. Today, the judgment rule has lost much of its effect.

 

New Threats for Directors & Officers

Recent laws governing employment have opened the doors to a relatively new category of potential adversary for Directors & Officers - its own workforce. Laws such as the Americans With Disabilities Act of 1990, the Civil Rights Act of 1991, and the Family And Medical Leave Act of 1993 have contributed to a dramatic increase in claims involving not only wrongful termination, but also discrimination and sexual harassment. These laws are often poorly written and vague, resulting in considerable time and money expended in each case being interpreted by the courts. Unfortunately, statistics are indicating that plaintiffs are prevailing more times than not. In any case, it is an expensive road to travel for the defense and directors and officers insurance settlements can have drastic impact on your bottom line. InsureCast has great experience in Directors & Officers Insurance and we are really competitive in this market segment. Please go to our online CoverageCoach questionnaire to get a free no obligation Directors & Officers Insurance quote.

 

Litigious Awareness

Liability insurance for the errors, omissions, and other wrongful acts of directors and officers has been available since the early 1960’s. Since that time, the increase in public awareness and expectations, and the more litigious nature of society, have resulted in a virtual explosion of litigation against corporate managers as well as judicial analysis of the conduct and standards applicable to Directors & Officers. The result is that Directors & Officers are frequently being “second guessed” by the courts.

 
 
 

 

Directors & Officers insurance

 

What is Directors & Officers Insurance?

Directors & Officers insurance provides financial protection for the directors and officers of your company in the event they are sued in conjunction with the performance of their duties as they relate to the company. Think of Directors & Officers insurance as a management Errors and Omissions policy.

Directors & Officers insurance can usually include Employment Practices Liability and sometimes Fiduciary Liability. The former involves harassment and discrimination suits, and is where the majority of your exposure will be.

Directors & Officers insurance is often confused with Errors & Omissions Liability. The two are not synonymous; Errors & Omissions is concerned with performance failures and negligence with respect to your products and services, not the performance and duties of management. Generally it is a good idea to carry both policies.

 
 

When do I need Directors & Officers Insurance?

When you assemble a board of directors, they will frequently make the requirement.

Investors, especially Venture Capitalists, will also usually require that you show evidence of Directors & Officers insurance as part of the conditions of funding your company.

Also having employees opens management up to employment practices lawsuits.

 
 

Why do I need Directors & Officers Insurance?

First, claims from stockholders, employees, and clients will be made against the company, AND against the directors of the company. Since a director can be held personally responsible for acts of the company, most directors and officers will demand to be protected rather than put their personal assets at stake.

Second, investors and members of your board of directors will not be willing to risk their personal assets to serve as a corporate director or officer, no matter how heartfelt their belief in your company.

Last, employment practices suits constitute the single largest area of claim activity under D&O policies. Over 50% of D&O (directors and officers) claims are employment practices related.

 
 

Directors & Officers can be held personally liable for the decisions they make

Yes, as leaders of a private company, directors and officers can be held personally liable for the decisions they make. Is your company’s board of directors comfortable with their level of personal risk?

Being private does not mean that the decisions of your board are immune from public scrutiny. Shareholders, employees, customers, suppliers, competitors and even the government may bring an action against your private company and its board. A corporate shield and broad by-laws offer board members and employees some protection. Unfortunately, in many cases, it is not adequate.

Typical lawsuits against directors and officers include allegations of:

  • Mismanagement of operations or company assets
  • Self-dealing and conflicts of interest
  • Misrepresentation during the sale of company assets
  • Misrepresentation in a private placement prospectus
  • Acts beyond authority granted in by-laws
  • Violation of certain state and federal laws
  • Breach of fiduciary duties

Each of these types of litigation can last several years, becoming a financial burden and a continuous drain to a private company’s profit margin. Indemnification from the company is a protection for its directors, officers and employees, but, sometimes it’s not enough. If a company cannot indemnify its directors, officers or employees, either because of the allegations of a lawsuit or as a result of the company’s insolvency, then this financial burden can become the personal responsibility of the company’s directors, officers or employees.

To help protect the directors, officers and employees of private companies, InsureCast offers Directors & Officers insurance coverage. An optional entity liability coverage is also available, offering additional protection for the company itself, should it be named with its board or on a stand alone basis.

 
 
 
News & Articles
Multiple Places, Multiple Policies
Insurance Is Our Native Language
No Policy Covers Everything
Reality of Lawsuits
New Public Company Rules Hit Private Firms
But I Want to Fight, Not Settle Out of Court!
Professional liability insurance for IT Staffing Firms
Terrorism Insurance Finally Arrives
Business Risk Management Tips
Are You an Equal Opportunity Employer?
Lawsuit Costs
Privacy Disclosure Rules
Expanding Exclusions and Limitations
Is Your PR Hurting Your E and O?
Is Professional Liability Insurance needed?
Sufficient Limits Are Key
Overview and Current D and O Market Trends
Insurance Market Overview
Directors and Officers/EPL Market
Why IT Firms need EO?
If Disaster Strikes (PDF)
Why Private Firms should have D and O? (PDF)
Insurance Solutions for Private Companies (PDF)
 
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