We live in a litigious world. It’s not unusual for directors and officers of a company or other organization to be sued — sometimes simply — because they are directors and officers of the organization.
Directors and officers may be sued for a variety of reasons, including:
- Breach of fiduciary duty which results in financial losses or bankruptcy
- Misrepresentation of the organization’s assets
- Misuse of the organization’s funds
- Fraud
- Failure to comply with law
- Infringement of intellectual property rights
- Poaching of competitors’ customers
- Failure to govern the organization
Many organizations indemnify their directors and officers with a standard indemnification provision, holding them harmless for losses due to their role in the organization. The indemnification is set out in a corporation’s certificate of incorporation or a limited liability company’s operating agreement. In addition, in many cases, a organization will provide Directors and officers (D&O) liability insurance.
D&O liability insurance protects the individuals from personal losses if they are sued as a result of being a director or officer. It can also help reimburse the business or organization for the legal fees and other costs incurred in defending the individuals against lawsuits. The coverage may also extend to criminal and regulatory investigations and trial defense costs.
Policies can be written to insure against a variety of hazards, but generally make exclusions for criminal activity and illegal profits and sometimes fraud. In addition, most policies contain clauses providing that no claim will be paid if current or former directors and officers sue the organization. This prevents the organization from profiting from deceit or conspiracy.
There is no standard D&O insurance policy. Each insurance company has its own form that differs from its competitors’ and most policies are the subject of extensive negotiations.
Alan N. Walter