The definition of a wrongful act plays an important role in determining D&O insurance coverage, as it specifies what actions executives are covered for.
D&O insurance protects an organisation’s management from claims made personally against them. Specifically, it covers them from any ‘wrongful act’ committed in the the performance of their official duties.
Put simply, a wrongful act is an action or decision that considered to be wrongful by another party. Even if the offending executives feel that their behaviour is reasonable at the time, if the affected party feels otherwise, a claim may be brought against them.
Examples of wrongful behaviour can include anything from failing to perform leadership duties with the required expertise or releasing misleading information about an organisation’s performance, through to making defamatory comments about another person’s character.
Allegations are wrongful too
In addition to claims faced by directors and officers due to their actual behaviour (i.e. acts that have actually been committed), they are also covered for allegations of wrongful behaviour.
This is important because claims often feature many details, recounts of events, opinions and conflicting interests for which the true position of liability is unclear.
The ability for D&O insurance to cover these situations ensures that management are protected for even the most obscure situations, no matter how wild the revelations may be.
It’s also important to note that if a policy includes any form of entity insurance, such as securities coverage, employment practices liability or management liability, the organisation may be also be covered for its own wrongful actions, in addition to those of its executives.
How is a wrongful act defined?
To ensure that an organisation and its management are protected against the myriad of claims in existence, the term ‘wrongful act’ is broadly defined within each policy wording. While this definition varies between policies, it typically covers any actual or alleged:
1. Act
Actions or decisions made by management that others deem to be wrongful. Examples of acts include breaching contractual obligations, infringing intellectual property, or instances of libel and slander.
2. Error
Errors can occur during any phase of a management role, and can range from unintentional mistakes, through to decisions made with poor reasoning and carelessness. Improper decisions made in day-to-day operations, incorrect reporting and regulatory non-compliance may also be viewed as erroneous behaviour.
3. Omission
An omission is when information is left out, not presented, or when an action is not taken as required. It often refers to management’s failure to act in a situation that requires their attention, or when they omit critical information from important documents or official statements, which are relied on by others to make informed decisions.
4. Misstatement
A misstatement is any statement that is incorrect or false. It consists of wrong information presented as fact. Unfortunately, even if a misstatement is later corrected, executives can still be held liable for the original act.
5. Misleading statement
A statement is considered misleading if it creates a false impression, is uninformative, unclear, or deceptive, even if the statement is true. Misleading statements generally involve a misrepresentation of facts by misleading, remaining silent, or telling a part-truths to the stakeholders who rely on this information.
6. Breach of duty
If a director or officer fails to comply with the legal requirements of their position, this may be considered a breach of duty. It may also include any situation where management has not acted in the best interests of an organisation, or when an executive hasn’t performed their duties with care and diligence.
7. Breach of trust
Breach of trust occurs when a director or officer fails to adequately perform their fiduciary duties on behalf of an organisation. Abuse of power, misappropriation, or any other act by an executive that violates the confidence of shareholders, can be considered a breach of trust, even if the consequences were unintended.
8. Neglect
If management does not competently perform their duties, or acts in a way which harms the performance of a organisation, they may be accused of neglect. Neglect can apply to a range of circumstances; from failing to seek professional advice when required, to not satisfying a duty of care owed to employees, customers and suppliers.
9. Breach of warranty of authority
A breach warranty of authority is when an executive acts on behalf of an organisation when they are unauthorised to so. If a director or officer incorrectly and wrongfully enters into an agreement on behalf of the organisation they claim to represent, this may constitute as a breach of warranty of authority.
