In our last blog post, Why D&O Insurance should be SMEs’ first focus, we discussed the history and importance of D&O coverage, particularly for SMEs. To further the conversation in understanding the value of D&O coverage, it is important to note how and when a D&O claim could arise. In this article, we discuss five of the main sources of a D&O claim.
Because shareholders have made a financial investment in a company, they expect that the directors and officers are acting in the best interest of that company to ensure its success. When a shareholder believes decisions made by directors and officers are not in the best interests of the company and threatens their investment they can resort to a legal action to assert their rights which can lead to an insurance claim.
An example of this would be when a minority shareholder(s) is outvoted in the sale of the organization, and the losing shareholder(s) feels oppressed in that he/she did not get fair value from the sale. While a D&O policy will not typically cover the shortfall, or “bump-up” amount, it will provide defense costs to the organization and the directors and officers against the oppressed shareholder(s).
It may be surprising to note that the main exposure (and certainly the most frequent claim) facing private organizations is from their employees. This entails lawsuits for employment practices liability for allegations such as wrongful dismissal/termination, employment-related discrimination, workplace harassment, and defamation.
If an organization is forced into liquidation, creditors may pursue directors and officers individually to try to recover on debt obligations. Allegations such as breach of their fiduciary duty, negligence, and deliberate misconduct can be made against the directors and officers in an attempt to recoup unpaid debt obligations of the entity.
Government entities / Regulators
Directors and officers have a responsibility on behalf of themselves and their organisation to ensure that they are in compliance with the various governmental statutes and regulations which govern the operations of the organisation. If these statutes or regulations are breached, legal action can be initiated against the directors, officers or the organisation which would then trigger a claim.
An example of this would be the provincial Ministry of the Environment going after an organization that has been found to have polluted a piece of land – the entity and/or the directors and officers would be held personally responsible for clean-up costs associated with making the land fit for use again. While most D&O policies will exclude clean-up costs, there is typically an element of defense costs that will be covered. In recent years, non-indemnifiable (or Side A) clean-up cost coverage has been offered by some insurance carriers.
As companies grow and profits increase, so does their pool of competitors. Competitors may come after a company if they feel they’ve been put at a disadvantage due to the behaviour of said company. Claims can arise for libel, slander, breach of intellectual property rights, anti-competitive behaviour, misappropriation of trade secrets or poaching of employees.
Directors and officers of any organisation face multiple exposures and business risks on a daily basis. These corporate and personal liabilities can easily lead to legal actions, defence of which incurring substantial, and in some situations, devastating legal expenses. In order to mitigate a loss following an unexpected legal action, companies must first protect their corporate balance sheet and their directors and officers. This can be done in a cost effective manner by putting in place a well-structured and robust D&O policy which will provide protection against these unpredictable events.
To further discuss D&O Insurance and coverage, please consult your broker or for more information, please visit our website and connect with us.
Chris Rebchuk is The Guarantee’s National D&O Product Manager responsible for the maintenance and development of underwriting standards, product innovation and supporting strategies for the Guarantee’s Directors’ and Officer and Fiduciary Insurance portfolios. Chris has over 34 years Commercial General Insurance brokerage and underwriting experience working with clients of all sizes in all the business sectors of Canada. He has been working in the area of Directors and Officers Liability insurance, in underwriting and management capacity, for 19 years.
Connect with Chris Rebchuk on: LinkedIn- in/chrisrebchuk
This blog/article is intended to be used for informational purposes only and does not intend to replace legal, technical or other professional advice or to represent actual or potential coverage under any insurance contract. At all times, the specific issued policy in its entirety –including all definitions, conditions and exclusions – is to be used when determining the scope of potential coverage under The Guarantee’s insurance products. The Guarantee Company of North America disclaims all warranties whatsoever.