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As the owner of a company, regardless of whether you’re a sole proprietor or you run a large corporation, you are continually at risk of being sued for liability related to decisions you have or have not made in managing your company. Litigation of this type can arise from just about anywhere. Suppliers, customers, competition and even the government may decide that they suffered losses as a direct consequence of your management activities. Lawsuits of this type can be expensive to defend against, and they may take all of your time away from the daily income generation activities.
Directors and officers insurance (D&O) protects you against liability risks that might arise specifically from management activities or decisions you have made. Mismanagement lawsuits may be filed against the company, each individual executive and director, or all. You see class action lawsuits from customers towards large corporations regularly in the news, and these same lawsuits can be filed against your own company.
Legal actions of this type can arise from customers who feel that you made a change to your business that harmed them in some way. Maybe you raised your minimum order amount for example, or stopped selling in a certain area. Suppliers may file liability suits against you over disagreements about changes in your operating policy and the federal government may sue you for failing to comply with specific laws or regulations. When your company has shareholders, the risks increase tremendously because they may have a strong financial stake in how you conduct business.
Directors and Officers insurance policies outline specific things they do or do not cover. Generally this policy covers litigation filed against your company and its officers by shareholders, customers, suppliers, competitors and the government. The SEC may file a lawsuit that claims your company directors committed fraud with public financial statements, or took actions to purposely manipulate your company’s stock prices. A group of customers may file a class action that claims your company is manipulating prices or falsely advertising services.
Directors and officers insurance normally lists specific issues that it will not provide liability benefits for. Each policy is different so it’s important for you to review it line by line with your insurance representative. Some policies specifically exclude coverage for discharging pollution for example, while others do not cover you when fraud charges are filed.
A directors and officers insurance policy helps protect the personal assets of your executives when lawsuits are filed against them. Most executives will not entertain employment offers from companies who do not carry this coverage because it puts them personally at risk. Specific language is normally written into the D&O policy that provides legal protection benefits for the executives when they are included in a lawsuit that is filed against the company. The coverage will pay for the executive’s attorney’s costs and other common fees that arise in court defense cases.
Directors and officers coverage protects corporate assets when lawsuits get filed against the company entity directly. When an executive does something wrong, lawsuits are usually filed against them as well as the company they work for. Directors and officers insurance works to provide liability protection for the corporate assets in cases where the executive is found guilty.