Directors & Officers Liability coverage provides protection for the personal assets of directors and officers against liability resulting from their management responsibilities in a corporate setting. Claims against Directors and Officers arise out of their management actions and are as varied as the corporations they govern. Claims against directors & officers typically take the form of:

  • Direct shareholder actions
  • Derivative actions brought in the name of the corporation
  • Employment related practices
  • Actions brought by competitors, vendors, suppliers, regulators or creditors, etc.

Companies usually purchase Directors & Officers Liability insurance to protect their management team from liability arising from their service to the corporation.

Directors and Officers Liability for Public Companies

Public company shares are traded on the major stock exchanges, such as NYSE, NASDAQ or over-the-counter exchanges. By virtue of their public status, they are subject to a myriad of disclosure and reporting requirements under the securities laws. Often their public status translates into a perceived deep pocket and makes them a more likely target for costly litigation.

Directors and Officers Liability for Private Companies

Corporations of all sizes need to have this coverage. In addition to the D&O exposures, they can also protect their EPL exposure through the purchase of a combination D&O/ EPL policy as the majority of claims are filed by employees. An organization with any of the following characteristics has a higher then average exposure to D&O lawsuits:

  • Contemplating an Initial Public Offering (IPO) or Private Placement
  • Providing loans to its Directors and Officers or key employees
  • Establishing a related business or doing business with a firm owned by a director, officer, employee, or family member
  • Shareholders with ownership interest in the Company but not a Director or Officer such as family members, investors, or former employees
  • Not having an annual audited financial review by a CPA firm

Claim Example:  The Insured decided to expand and acquired a small company in a related field. After operating the newly acquired company for several months, the Insured realized that poor accounting and collection procedures had been in place for some time and sales projections were unrealistic. The decision to acquire the company and the purchase price were based on faulty information. A concerned shareholder consulted a CPA experienced in mergers and acquisitions and decided the Insured paid too much. The shareholder sued each of the Insured’s Board members for making an uninformed decision and failing to substantiate the seller’s information by consulting with appropriate experts. Before trial, the Insured settled the shareholder claim for over $200,000.

Directors and Officers Liability for Non-Profit Organizations

There is a common misconception that the Board of Directors of Non Profit organizations are granted immunity from lawsuits. Although protection is provided to the Board under state law, there is no immunity from federal statutes. Most lawsuits originate under federal law. Immunity laws only protect volunteer members of the Board, but there is no protection to the Executive Director or paid employees. Finally, immunity laws only protect the individual Directors and Officers. However, most lawsuits are made against the entity itself, which will still have to provide its own defense. The average cost of defending a non profit lawsuit closed by litigation is over $147,000. Without D&O protection, most non profits are forced out of operation. Regardless of size, all non profits need this important coverage. According to the latest surveys almost 80% of the litigation against non profits are brought by employees. Non profit policies will generally include employment practices protection for no additional charge. The classes of business with the highest frequency of claims are:

  • Condominium/ Homeowners Associations
  • Country Clubs
  • Healthcare Providers
  • Membership Organizations
  • Schools
  • Social Services Organizations
  • Trade Associations

Claim Example:  A country club was sued after it refused to allow a member the use of a golf cart after torrential rains soaked the course. The member sued under the Americans with Disabilities Act (ADA) alleging he was discriminated against because his physical limitations would not allow him to walk the golf course. The club testified that by allowing the use of the golf cart the member would have called thousands of dollars in damage. The club was acquitted of any wrongdoing, however it expended over $70,000 in defense costs.

Employment Practices Liability should be part of every insurance portfolio. Statistics show an employer is more likely to have an EPL claim then a general liability or property loss. Companies can protect themselves against discrimination, sexual harassment, wrongful termination, and retaliation claims. Claims may be brought by either employees or by the third parties with whom the Company interacts during the course of business. Employers are held liable whether they had any knowledge a violation was committed. An EPL Policy can also provide smaller companies with much needed human resource and risk management support. Even if the claim is without merit, thousands of dollars in defense costs will be expended.

Employers of every size need EPL protection. Over 60% of the EPL claims filed annually are against small employers (1-50 employees). Any organization without a full time human resource person should not be without coverage. It is also vitally important for large employers to be protected, lest they be considered a “deep pocket.”  Aside from additional risk management training, an EPL policy is great protection against costly class action litigation.

Claim Example: A man was fired after a co-worker complained about inappropriate comments made during a conversation with fellow employees about a Seinfeld episode that aired the evening prior. The Company cited a zero tolerance policy on sexual harassment as the grounds for dismissal. The man sued the Company saying he was wrongfully terminated and that the dismissal was a result of his age. The jury found in favor the plaintiff, and the man was awarded over $100,000 in lost salary. Punitive damages were also awarded for over ten times that amount!

Our society places great value on the services of professionals, but the consequences of mistakes can be even greater. Lawsuits, allegations of negligence, client discontent, and missed deadlines all put fear in the hearts of today’s professionals. In some cases, the only things between your client and financial ruin are a favorably worded contract and a good lawyer.

In the ideal world, your client would have the peace of mind that comes with the financial backing of a solid insurance company. In the real world, some professionals may not be aware of the many benefits afforded by an errors & omissions policy.

As mentioned above, maintaining an E&O policy with a financially sound company offers peace of mind. Your client may also be able to obtain more business, as many of their clients will require at least the minimum limits available. Another advantage is the duty to defend clause contained in most policies. When the client alleges professional negligence, regardless of the ultimate outcome of litigation, insurers will pay for the costs of legal counsel and related expenses. This protection is at hand even if the allegations are groundless. As an insurance professional, you must ensure that your clients are protected by an errors & omissions insurance policy.

What is errors & omissions insurance?

Errors & omissions insurance, also referred to as professional liability insurance, covers an individual or business for alleged “acts, errors, or omissions” committed in the scope of their profession. Coverage is typically limited to financial loss that does not involve bodily injury or property damage. Simply put, errors & omissions insurance covers negligence or allegations of negligence by professionals.

Who needs errors & omissions insurance?

Traditionally, errors & omissions insurance was limited to accountants, architects & engineers, and lawyers. In today’s litigious society, any individual or business that can be sued for the professional services they render should inquire about the availability of errors & omissions insurance. Frequently, as a condition of doing business, many contracts awarded will stipulate that the independent contractor providing professional services must maintain a professional liability (E&O) policy.

What is excluded in an errors & omissions policy?

Although each policy form will reflect the exposures unique to an individual or business, errors & omissions policies will usually exclude general liability, directors and officers, and employment practices exposures (these are typically covered in other policies).

What is a claims-made policy?

Most errors & omissions policies are written on a claims-made basis, meaning that a claim must be brought against the insured (and reported to the insurance company) during the policy period to trigger coverage. Coverage is generally excluded for acts, errors, or omissions that occurred prior to the retroactive date of the policy.

What is a retroactive date?

The retroactive date is the date assigned on the policy for which no coverage is granted for all incidents or occurrences preceding that date. Once coverage is in place, the retroactive date remains the same for each year the policy is renewed.

How is E&O coverage underwritten and priced?

Underwriting and pricing of Errors & Omissions liability insurance is subjective in nature. Underwriters consider the insured’s industry class, historical financial performance of the insured, claims history (if any), experience of the professionals, among other factors.

 

Products liability refers to the liability of all parties along the chain of manufacture of any product for damage caused by that product. This can include the true manufacturer, assemblers, wholesalers, and retail sellers. Claims are typically brought by the consumer who is harmed by the product.

This is the one area in which we offer protection outside of our typical D&O/E&O/Employment Practices niche. PLUS has two extremely strong markets dedicated to difficult Products Liability risks. What’s a difficult products risk? Perhaps these recent placements will help you understand our appetite:

  • Coverage for a manufacturer of practice bullets for the U.S. Military
  • Coverage for a maker of lead shields used in medical X-ray labs
  • Coverage for a U.S. drug wholesaler where the drugs are manufactured in Mexico
  • Coverage for a water heater manufacturer whose defective products caused two total fire losses
  • Coverage for a heat transfer device used in pipelines

These are just a few examples! Note that we can also offer companion General Liability insurance, if your standard markets are uncomfortable with the risk.