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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 |
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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.
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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. |
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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. |
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Directors & Officers insurance |
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What is Directors & Officers Insurance? |
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| 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. |
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When do I need Directors &
Officers Insurance? |
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| 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.
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Why do I need Directors &
Officers Insurance? |
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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. |
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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. |
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