Many smaller businesses mistakenly assume that they do not need D&O insurance, as they do not have shareholders. Others assume that they are covered under general liability. This is not the case. Here, Doug Kelley uncovers some common myths concerning Director’s and Officer’s liability.
Whether your company is a small business or large corporation, it faces potential risks, regulations and litigation. Directors and Officers liability insurance (D&O insurance) provides financial support and defense against potential investigations into the behavior of these executives and the possibility of their being sued. Without such insurance, the company is left to pick up the tab from their own resources.Or, failing that and more worryingly, it can often be left to the director, themselves.
A smaller company is not immune to possible investigations into a Director’s behavior
You will find that most larger corporations tend to take out Director’s and Officer’s liability insurance, as it protects their shareholders’ value and allows them to recruit the top candidates for these positions. But it is generally the case that smaller businesses are less likely to seek out this insurance, which is somewhat counter-intuitive considering their likely inability to meet the potential huge fees that may result from defending such a case. Falsely assuming that a smaller company is less likely to come under such problems is a naive approach, as company size has no bearing on the potential for investigations into a director’s or officer’s behavior.
Two types of Directors and Officers liability insurance
There are two types of liability insurance, including both corporate and individual coverage. Corporate coverage is where individuals are not named and all directors are covered, whereas individual coverage is personal to a specific director and perhaps also their spouse and estate. Individual coverage can be taken in addition to corporate coverage and acts an additional layer of defense, should the company be unable or unwilling to defend the director.
A typical policy will cover the costs of any investigations, awards, damages or settlements. With so many areas where claims could be made against a director or officer and the fact that a director’s personal assets could be at stake, this form of liability insurance is a no-brainer.
It doesn’t cost much to protect yourself
Often, companies or directors will expect that this type of coverage is expensive and not worth the cost, but this is not really the case. Premiums can start on average from as little as $600 – $700 per year or less, depending on your exact requirements and the type/size of your company. Considering the high potential to come up against claims that could run into the thousands, if not millions, of dollars, the cost is a mere drop in the ocean.
Just because your business has high moral standards, doesn’t mean a director’s behavior will go unquestioned
Some Charities or Trusts will assume that they don’t need coverage, but the truth of the matter is that all organizations can be investigated or sued for the way in which they are managed. In particular, these kinds of organizations will not want to rely on their own much needed resources to fund a legal defense, so it is well worth at least finding out if your organization has sufficient coverage in place.
Investigations can begin even after you’ve left a company
It is also important to know that, even if you leave a company as a director or officer, you can still be sued or investigated for your behavior for the time you were there, and in many cases, a prior employer will not necessarily readily fund this cost once you have left. Even if you are a non-executive, you can be found liable for unreasonable behavior if it is proven that you were acting as a director. And you can’t always assume that your company will be quick to defend you.
As Director of Bluedrop Services, Doug warns, “Don’t be caught with a lack of insurance in place. Even when not guilty, proving your innocence can be highly expensive and damaging to your character without access to the best possible representation for you.”