directors and officers

Directors and Officers: Best Practices to Minimize Lawsuits

The directors and officers of a company bear the final responsibility for oversight and management of the company’s business affairs. These stakeholders manage a diverse set of governance challenges and experience significant risks in the discharge of their duties. Directors and officers (D&O) insurance serves as the foundation of risk management for corporate leaders. By ensuring adequate D&O insurance coverage, and by adhering to best practices in corporate governance, risks can be minimized – ultimately protecting the corporate and personal assets of its leadership team.

Challenges for Directors and Officers

Corporate governance is a complex field of business management, requiring a thorough understanding of the factors that influence fundamental business decisions. These factors include adherence to:

  • State laws – state laws of corporations may govern a variety of aspects of business management such as the fiduciary and liability duties of directors as well as requirements for shareholder notification.
  • Federal laws – the U.S. government imposes strict regulations on the governance of public companies that cover ethical and business decisions as well as auditing and compensation requirements for business leaders.
  • New York Stock Exchange/Nasdaq compliance regulations for publicly-traded companies – governance of public companies under these organizations requires practices that are in the best interests of company shareholders. These requirements may include specific shareholder rights, voting procedures, and the appointment of independent chairpersons.

Failures in any of these governance areas may result in steep regulatory penalties as well as reputational harm of the company and its leadership. These failures may also result in legal challenges by shareholders, potentially costing millions of dollars in judgements and settlements unless robust D&O insurance is in place to protect against these claims.

The Duty of Care for Directors and Officers

With the oversight and management of corporate strategy in the hands of directors and officers, the concept of “duty of care” comes into play. In simple terms, duty of care refers to the responsibility of exercising business decisions that are influenced by common sense, financial prudence, and careful consideration. Directors and officers must make decisions that are in the best interests of company operations and shareholders; to do so, decisions require investigation and due diligence on the part of leadership teams.

Best practices for directors & officers duty of care include:

  • Providing sufficient notice prior to board meetings to ensure adequate time to prepare.
  • Discussion of business decisions with management teams as well as legal and financial counsel.
  • Requesting and reviewing of documentation that describes the reasoning behind proposed transactional decisions.
  • Ensuring full participation of all directors and officers to allow for questions to be posed and to share relevant information.

Board Composition and Independence

The most successful corporations enhance the protections of D&O insurance by forming boards that are diverse, engaged, and independent. It is this latter aspect that is of the utmost importance; in fact, board independence is often a requirement of certain state and federal corporate governance regulations. Independent board members are those not influenced by direct company management, giving them the ability to be free of personal or business relationships.

Choosing the right board members is a crucial part of good corporate governance. A quality board member will be:

  • Engaged through the collection of information about the company and its management teams.
  • Ready to review materials for board meetings as well as the transactional details that influence business decisions.
  • Responsive, with clear communication especially in crisis situations.
  • Ready to ask difficult or complex questions to determine the best path forward for corporate decision-making processes.

Finally, board members should be knowledgeable in the requirements and regulations of corporate governance, including both federal and state laws as well as those imposed by stock-trading organizations. Adherence to these requirements on the part of boards serves as a critical component of risk management, helping to reduce potential lawsuits or other legal claims on D&O insurance policies. A strong and independent board works to lay the groundwork for continued business success.

About U.S. Risk

U.S. Risk, LLC. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.

d&o insurance market

How Has COVID-19 Impacted the D&O Insurance Market?

From its very beginning, the coronavirus pandemic has had a dramatic effect on the global economy. In the United States, businesses were forced to make difficult decisions, including shuttering operations and laying off workers. These decisions are often accompanied by emerging risk exposures. Risks associated with COVID-19 concerns have sparked concern within the directors & officers (D&O) insurance market. Scrutinizing operations in the hopes of holding corporations accountable for the weakened economy has meant that many large business owners are in the crosshairs – facing legal challenges that will have long-range impacts.

Litigation Against Corporate Interests

Lawsuits against corporations began in earnest in May, 2020. The first, a complaint by shareholders against cruise ship giant Carnival Corporation, alleged that the company had mislead investors about its responses to the coronavirus. The suit also alleges that Carnival had violated port authority regulations regarding the number and severity of COVID-19 infections on board its cruise ships. While D&O insurance is designed to protect businesses against lawsuits of this nature, high-profile litigation further interrupts operations as companies attempt to restore their economic prospects in the wake of the pandemic.

Sorrento Therapeutics was the target of another shareholder lawsuit. The California company had made an announcement that its research had uncovered an antibody effective against the novel coronavirus. As a result, the company’s share price skyrocketed, and investors clamored to purchase its securities. Soon after, another research organization claimed that Sorrento’s antibody claims as sensational, leading to a dramatic drop in share price. One of the shareholders who had purchased securities in May then filed a legal claim against the corporation.

A Tidal Wave of D&O Insurance Claims?

The Carnival and Sorrento lawsuits are only the tip of the litigation iceberg, according to insurance industry analysts. Many analysts expect numerous additional claims against both public and private corporations – claims that target the directors and officers of these businesses. Potential claims run the gamut from misleading or false statements that drove up stock prices and purchasing interest to financial mismanagement, failure to produce desirable investment returns, or mass layoffs that harm business operations.

Most concerning in the D&O insurance market is the government protections associated with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides emergency funding for smaller business operations in the United States. Shareholders may argue that larger, better-funded corporations should have had more robust financial procedures and reserves in place to protect against economic hardships. This perception of mismanagement may open the door to dozens, if not hundreds, of new legal challenges, potentially overrunning even the most comprehensive D&O insurance protections.

Insurance Carriers React

Faced with the prospect of covering a spate of D&O insurance claims, insurance carriers have tightened their underwriting guidelines. Many carriers have also raised premium costs, added COVID-related exclusions, and introduced higher retentions.

Insurance agents are being advised to be proactive with their business clients, encouraging them to share financial management and coronavirus response information long before policies reach renewal. By doing so, this can help lock in favorable premium rates for clients. It is also critical that agents convey any potential changes in the policy language, such as reduced limits or new exclusions related to financial management regarding the COVID-19 pandemic. For existing insureds with high limits, it is recommended that agents discourage companies from reducing their limits to save on premium expenses; this is particularly true for companies that have D&O insurance coverage written as a claims-made form. Failure to retain existing higher limits may result in staggering expenses down the road.

About U.S. Risk

U.S. Risk, LLC. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.

Directors & Officers

A Closer Look at Directors & Officers Insurance

In any corporation, the company’s leadership team is comprised of a group of executives entrusted with managing the business. These leaders must often make difficult decisions that influence the financial stability and growth of a given company. The duty to manage the company comes with significant risk exposures, necessitating specialized liability insurance protection. That is where Directors & Officers (D&O) liability insurance plays a vital role, protecting the personal assets of corporate executives and their families. Here is a closer look at D&O insurance, how it works, and how it can give peace of mind to corporations across industries.

What is Directors & Officers Liability Insurance?

Known in the insurance world as “D&O” insurance, Directors & Officers Liability Insurance is one part of a comprehensive risk management strategy for corporations. In simple terms, this insurance is designed to protect the personal assets of corporate leaders and their spouses in the event they are sued by other parties for any alleged or actual wrongful acts committed while managing the company. Personal suits for alleged or actual mismanagement can come from employees, customers, vendors, and investors in the company as well as many other third-party sources.

In addition to protecting the personal assets of corporate leaders, D&O insurance typically provides coverage for the legal expenses, judgements or settlements, and other costs associated with legal claims.

What are the Risks Directors and Officers Face?

The executive leaders of a company have an obligation of corporate governance, or the actions needed to keep the company healthy and secure. Unfortunately, this obligation comes with substantial risks. Anyone who believes that the directors and officers of a company are failing in their roles in corporate governance or financial duties may wish to file a legal claim against them. Common legal claims include:

  • Lack of or negligence in corporate governance
  • Failure to comply with workplace and employment laws
  • Misuse of corporate funding
  • Misrepresentation of the company’s financial assets
  • Breaches in fiduciary duty, including financial losses or bankruptcies
  • Claims from competitors, including theft of intellectual property or patents as well as poaching competitors’ customers

Under most D&O policies, criminal acts or illegality are not covered. While allegations of fraud are a common type of legal claim filed against corporate leaders, legitimately fraudulent behavior on the part of these leaders is generally not covered under D&O insurance.

Who Needs D&O Insurance Coverage?

For many years, D&O insurance has been associated with the largest corporations, such as prominent Fortune 500 firms. In reality, nearly every business that has a corporate board of directors or a management advisory committee can benefit from the protections afforded by D&O liability insurance. This can include both profit and non-profit companies as well as public agencies or organizations. If an organization has a directors group, any of those leaders can be personally sued for the myriad of reasons illustrated above. Investing in D&O insurance makes sound financial sense, protecting the assets of leaders and their families.

About U.S. Risk

U.S. Risk, LLC. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.