Protect Your D's and O's

Oh yes, Directors and Officers. Why would I buy D&O Insurance?

The basic principle is that companies and their shareholders are best served by knowledgeable Directors and Officers who take strategic risks based on the information that is reasonably available to them at the time the decision is made, without the threat of personal liability. But what about the Business Judgement Rule? Won’t that protect me?

From the Utah Division of Corporations and Commercial Code, “Directors and officers must act within their authority and within the powers given to the corporation. They also have the duty to act with due care. Their duty of loyalty requires them to act in the best interests of the corporation as a whole. Most management actions are protected from judicial scrutiny by the business judgement rule: absent bad faith, fraud, or breach of a fiduciary duty.” As practical as that proposition may sound, it is still within the power of states and individual companies to deny such executives indemnification for claims that arise out of their well intended efforts. As a result, D&O insurance exists.

The most sought after D&O’s are concerned with the quality of a companies insurance program because under state law, their personal assets are at risk as well as their hard earned reputation. Therefore, companies with quality D&O coverage are most suited to attract the best directors and officers to serve the corporation. D&O insurance is usually purchased by the company itself even when it is for the sole benefit of the Directors and Officers.

In terms of basic state corporate law (at least in the U.S.A.), directors and officers of a corporation can be liable if they damage the corporation by breaching their duties and contracts to the corporation, mix personal and business assets, or fail to disclose conflicts of interest. Even innocent errors in judgement by an executive can bring D&O insurance to the forefront of the matter in defending and settling the claims.

My purpose in this post is not to go into the various claim scenarios, policies available, exclusions, etc. but to make you aware of this risk (mainly pertaining to any corporation). There are many insurance products out there for D&O coverage and some include a package of other coverages as well that would maybe include Employment Practices, Crime, Fiduciary Liability, Workplace Violence, or others.