Shortly after my husband and I moved to our current home, I decided to take a turn sitting on our Homeowners’ Association Board of Directors. One of the first issues that arose for the board that year was a dispute from an association member who accused a fellow board member of misrepresentation. The issue was ultimately resolved short of litigation, but I was surprised to find that our Association board did not carry insurance coverage for claims against our officers and directors. When I asked fellow board members about it, they all agreed that no one thought such a claim would ever arise, and, therefore, they had never considered obtaining a director and officer (“D&O”) liability policy. With a friendly nudge from their newest board member, the policy was investigated and ultimately purchased, at a cost which was surprisingly low.
The story of our Association is not uncommon. Once considered a concern for only executives of public companies, the need for a good D&O policy in the private sector has been largely overlooked until recent years, for several reasons. In some cases, corporate execs mistakenly believe that D&O coverage is included in their general liability policy. And like the members of my Homeowners’ Association, many simply believe that the likelihood of such a claim arising is extremely low and so the coverage is not needed. But a recent Chubb Insurance Group survey* found that 44% of private companies experienced at least one loss event related to D&O liability, employment practices liability, fiduciary liability, employee fraud, workplace violence or cyber liability. And even the smallest companies surveyed, those with 25-49 employees, showed significant levels of loss activity, at 33%.
Another common misconception in the private sector is the assumption that the legal structure of the entity creates a “corporate veil” that prevents corporate executives from ever facing a claim for faulty or negligent management practices. What many fail to appreciate, however, is that the corporate veil provides only protection, not a guarantee, against liability for improper management practices. There are circumstances under which the corporate veil may be “pierced” and liability for egregious management practices placed upon corporate officers and directors. Even more significant, the corporate veil provides no protection from the cost of defending claims, regardless of whether liability is ultimately found. The cost of defense of a D&O claim can be staggering, as shown in the Chubb survey, which found an average total cost for D&O lawsuits for private companies (including judgments, settlements, fines and legal fees) of $697,902.
Recent trends in business litigation support consideration of D&O liability coverage. Increased professional and management liability claims, increased mergers and acquisitions activity, new potential for government fines, an increasingly litigious society, and newly surfacing data theft and cyber crimes all contribute to the increasing exposure of corporate executives in companies of all sizes. Private entities and their executives, in both the for profit and nonprofit arenas, are well advised to investigate D&O insurance coverage, which can often be rolled in with other corporate policies covering employment practices liability coverage, fiduciary coverage and even cyber liability coverage at premium discounts for comprehensive or multiple policies.
If you would like further information regarding director and officer liability exposure, please feel free to contact us, at (248) 477-6300.
*Chubb 2013 Private Company Risk Survey
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