The directors and officers of an organisation are in a position of great power and responsibility. The development of legal systems has placed even further onus on the formal duties of company executives, and the responsibility they have to the welfare of the entities they control. As a result, it is not unusual for management to be held personally liable when their decisions don’t go as planned. Risk management important consideration for executives; but what are personal exposures and why is directors and officers insurance an effective solution?
Who exactly are directors and officers?
Directors are responsible for leading and supervising the operation of an organisation. They are often elected to a board of directors, who will oversee all matters relating the organisation’s governance and performance.
A corporate officer is typically involved in the day to day running of the business, operating in a position of authority such as chief executive officer, chief financial officer, or other department head. However, corporate officers are not only those with formal positions of authority, but also employees who are tasked with making key decisions and supervising business operations. Directors and officers insurance is designed to provide broad protection to the members of an organization who carry these leadership responsibilities.
Where do executive exposures come from?
Directors and officers provide a company with strategic direction, and are tasked with satisfying the strict requirements and duties imposed on the management of a corporation. The modern legal environment presents many challenges for executives, as they can be held personally accountable for the decisions they in their capacity as management. Their actions can impact stakeholders in a variety of ways, and as a result they can be exposed to claims from a range of sources, including shareholders, market competitors and regulatory authorities, to name a few.
Common claims against management
Investigations into wrongful conduct and civil litigation against company executives can arise from any number of stakeholders, which have an interest in the operation of a business. Unfortunately when a claim is made against a director or officer, it must be defended, no matter how frivolous the allegation. So, what are some common examples of claims made against management?
- Shareholders alleging breaches of directors duties
- Allegations of breaches in in fair trading legislation by competition watchdogs
- Investigations of insolvent trading by liquidators on behalf of unpaid creditors
- Claims of misleading conduct by investors
- Shareholders disputing merger and acquisition activity by the company
- Claims by employees of unfair dismissal, discrimination and sexual harassment
- Allegations of defamation by business competitors and politicians
- Regulatory authorities investigating corporate governance compliance
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Why buy directors & officers liability insurance?
Legal claims against directors and officers are not restricted to high-flying executives. In fact, any member of management can be exposed to considerable personal loss resulting from a breach in their official duties. Without the appropriate protection, an executive’s personal assets are at risk of being lost whilst defending themselves from allegations of wrongful conduct.
In situations where a company can indemnity a director or officer, insurance coverage will protect the company’s financial health. In circumstances where a company can’t, insurance will be the only protection for executives who would be otherwise be forced to sell their personal assets to fund their legal defence.
Who buys D&O protection?
Directors and officers liability insurance has traditionally been purchased by publicly listed companies, as well as most medium to large private companies. In response to growing legal exposures over the past decade, there has been an increased take up of D&O coverage by small-medium enterprises (SMEs) and not-for-profit organisations.