Protect Your Company and Personal Assets From Management Liability Risks

JULY 5, 2023

In today’s litigious business environment, the importance of directors’ and officers’ liability insurance, known as D&O, for small- and medium-sized businesses has never been greater. The easiest way to avoid costly gaps in coverage is to have this kind of policy, which is intended to protect the company’s leadership against personal loss in the case of a lawsuit. However, many businesses do not purchase this coverage, or purchase insufficient limits to meet the cost of defending and settling claims, because agents and brokers fail to help them identify and understand how their business is vulnerable.

Although some business owners may recognize these risks, they often believe that the “corporate veil” is sufficient to protect their personal assets if the business cannot indemnify them. This is not the case, and directors and officers (often the owners of the company) can be left personally liable for the actions – and debts – of the corporation.

It takes a broker knowledgeable in this area to help clients understand the actual exposures they have. USI associates educate our clients on their D&O exposures and the common types of claims, such as:

According to a 2016 Chubb survey, 43% of private companies don’t carry D&O coverage.¹ With an average private company D&O claim cost of $450,000, not having the proper coverage or sufficient limits can mean financial ruin for many businesses. Claims can be brought against a company by a partner or shareholder, employees, customers, vendors, competitors, creditors, and government regulators. In the case of a family business, it’s not unusual to have disputes between different generations or even siblings.

Given the availability and economy of D&O insurance, an organization that neglects this coverage may be putting itself in unnecessary financial peril. With new and emerging risks popping up at every turn, increased claims activity, and the current levels of litigation, companies should work proactively with their brokers to develop an effective risk management and transfer strategy that includes adequate D&O coverage.

USI’s ExecuSafe endorsement packs – unique in the industry – can identify and address a company’s D&O and management liability risks, and provide protections that create a positive financial impact for clients who experience a claim.

Once the organization’s leadership recognizes how their business is exposed, they can make a more informed decision about how to protect both the company’s bottom line and their own personal assets.

The following scenarios² show how D&O insurance can protect businesses as well as executives:

Creditor Suit: Unsecured creditors stated that a company’s board of directors used up the organization’s assets by paying bonuses and salaries to its directors and officers right before the sale of the company, which was technically bankrupt. The allegations of financial mismanagement and misappropriation of company funds led to a lawsuit in which D&O insurance proceeds covered over $1 million in settlement and defense costs.

Competitor Disputes: A company claimed that a former employee left to work for a competitor and allegedly used confidential information to provide an unfair advantage to her new employer. The company also claimed that the former employee possessed other pieces of proprietary information and intellectual property she shouldn't have had. In court, the company claimed it had suffered irreparable damages from the misappropriation of trade secrets, confidential information, and unfair competition. The total defense cost and settlement for her new employer exceeded $450,000.

Sources:
¹https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/private-business-directors-officers-liability-insurance-risk-survey/documents/pdf/2017-06.14-617650-private-co.-survey--na-do-infographic-electronic.pdf
²https://www.phly.com/Files/Private%20Company%20%20Directors%20and%20Officers%20Liability_Claim%20Scenarios36-10575.pdf