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Technology Insurance
Loss Scenarios for IT Firms
  Defending software that performed as promised.
A software company was sued by a customer after he used the company´s cost estimating software. The software itself was found to have functioned perfectly. The customer eventually dropped the case, but only after considerable legal expenses were incurred by the software company.
Indemnity Paid: $0
Defense Cost Paid: $175,000

New Threats


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.


D&O Insurance

Ever since entry of domestic Directors & Officers Liability Insurance in the 1960’s, there has been a lack of uniformity of policy terms and conditions. There is no standard form of D&O coverage, and at this time there are over 40 different insurers writing D&O insurance, and over twice that many different basic D&O policies.

Unlike many types of insurance, where a price comparison may be made based on similar forms of coverage, D&O policies must be analyzed and understood if they are to meet the expectations of the Directors & Officers as well as the business entity.

As much of importance in understanding what IS covered by D&O, it is also important to understand what is NOT covered by D&O.


Common Exclusions in Directors & Officers Insurance

  • Arising out of the Directors, Officers, or Company gaining in fact any profit or advantage to which they were not legally entitled.
  • Arising out deliberate fraudulent, dishonest, or criminal acts
  • Bodily Injury or Property Damage
  • Discharge of Pollutants
  • Acts committed in the capacity of Director for any Outside Entity
  • Acts committed as Director of a Subsidiary that occurred prior to acquisition of the Subsidiary

Directors & Officers Liability


Overview and Current D&O Market Trends


Who Needs Directors and Officers Liability Insurance?

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


Obligations of Directors & Officers

Essentially, Directors & Officers are considered to have a duty of care, whereby they follow the “prudent person rule”, make informed decisions, perform in good faith, and act in the best interest of the company. They also have a duty of loyalty that includes no furthering of personal interests and refraining from personal action damaging to the corporation. Finally, they have a duty of obedience to perform duties within the corporate charter/by-laws and act in accordance with all laws, statutes and regulations pertaining to their industry.

Breach of any of these obligations can incur personal liability to the individual Director or Officer involved as well as an allocation of blame to the other Directors & Officers on the board, possibly extending to the corporation itself (80% of lawsuits now also name the corporate entity as a defendant.)


Common Allegations Against Directors & Officers

Most 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.


Typical Plaintiffs

According to a 1996 survey by Watson Wyatt Company, there are six major sources of Directors & Officers lawsuits. Those plaintiffs, and the basis of the suits, are listed as follows

1. Stockholders
Inadequate/inaccurate disclosure
Financial reporting
Disappointing financial performance
Fiduciary duty/gross negligence
Stock or other public offerings
Bid or threat by another company for takeover

2. Employees
Wrongful Termination (this is the single most frequent claim!)
Breach of Employment Contract

3. Customers/Clients

3. Competitors

5. Other Third Party
Environmental Public Activists

6. Government Agencies
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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