Employment Practice Complaints and Directors Liability Insurance

Directors and officers face quite a few exposures in their position with a company. Directors, often on the front lines when it comes to new hires, see the potential for employment practices litigation (EPL), which fortunately can be added coverage to most D&O policies, as part of their directors liability insurance policy. Claims over employment practices are among the most common lawsuits brought against a company’s management, from public, to private and nonprofit entities.

Most business owners assume that the chances are good that their business will experience a D&O related loss at one point or another due to the litigious nature of people in general. Some high profile companies say they have experienced a D&O lawsuit within the past five years, and the costs to settle and/or litigate those cases averaged close to $230,000, with some losses approaching $5 million.

D&O policies can be customized for the unique needs of the client

D&O coverage is generally for some fixed level of claims per year. For example, if a large claim is paid on behalf of one director, this can possibly leave other directors, officers, or the corporation itself, exposed for the remainder of the year.

Customers of private companies are among the leading plaintiffs in litigation against directors and officer of private companies. D&O suits also come about due to “employee piracy” issues. This occurs when a key employee leaves one company to start or join a competing firm and their previous employer files suit against the new firm amid claims of theft of intellectual property or customers, as well as other business information they feel was wrongly acquired.

A bankruptcy can be the cause of litigation against directors from creditors, lenders, customers, and investors. Even if a company doesn’t go bankrupt but needs to downsize, resulting in employee layoffs – this may prompt claims personally targeting directors, in addition to the business itself. Some employees may feel unfairly persecuted when the company they work for implements layoffs, which might result in their decision to sue. They may simply claim that they were let go due to issues of discrimination. Directors liability insurance, with provisions for EPL, is the solution to a growing problem.

Which Organizations Need Directors and Officers Insurance?

Directors and officers insurance provides coverage in the event of claims against the acting directors or officers of various organizations. A typical question for groups considering purchasing this insurance is, which of these directors and officers benefit most from this insurance? Proper coverage for directors and officers is always beneficial, but it is especially important in the following settings.

Publicly or Privately Held Companies

Directors and officers serving in either type of company can face significant liability. Officials running publicly held companies are accountable to shareholders, while those in charge of privately held companies must answer to investors. In either case, there is always a possibility of directors or officers making missteps (or being accused of doing so) while overseeing the company.

Non-Profit Organizations

The directors and officers of non-profit organizations may be vulnerable to claims for unlawful practices, mismanagement of funds, violation of the organization’s charter and more. The risk of inadvertent misconduct may also be high. Since many of these directors and officers work on a voluntary basis, they may have less business experience than their counterparts in other organizations.

Various Institutions

The directors and officers of influential institutions, such as financial, educational and public institutions, may also need directors and officers coverage. These leaders often make decisions that are financially or otherwise impactful, which can expose them to claims.

Protecting Professional Interests

Before ruling out a directors and officers insurance policy, decision-makers at any of these organizations should consider the potential losses that the organization and its leaders could face during a claim. Even if claims seem unlikely, this insurance can be highly worthwhile, given the serious consequences that just one claim can have.

Directors Liability Insurance for Much-Needed Protection

There is very little that directors of an organization can do to diminish the complexity of the business model that makes up their duties, as well as the legal and regulatory environment in which they constantly operate. The fact is, directors often find themselves working in an extremely difficult environment. Many of the fundamental principles governing their conduct constantly come under increasing judicial and regulatory scrutiny.

One serious concern is the legal ramifications when a lawsuit develops questioning their use of power within their position. Fortunately, a great deal can be done to protect the personal assets of directors. Directors liability insurance, or directors and officers (D&O) insurance protects against legal claims for wrongful acts performed by corporate directors or officers as part of their corporate duties.

Types of claims associated with this position

Wrongful acts include omissions, errors, misleading statements, misstatements, neglect or breach of duty. Beneficiaries are generally the directors, officers or, in some cases, the corporation. Shareholder groups have only added to the problem by pressuring corporate management to make dramatic changes along with what they feel are improvements in order to remain economically competitive in the complex world markets of today.

While there may be no single solution for protecting directors from liability issues, directors liability insurance can be an effective tool in mitigating a firm’s overall exposure. Many agencies are available to provide D&O insurance designed to protect a director or officer of a firm for liability due to breaches of duty resulting from any of the aforementioned accusations.

Directors coverage is typically underwritten on a one-year basis for a single aggregate limit of liability. Most corporations will purchase entity coverage in one form or another, or have a predetermined allocation for securities law claims as a means of avoiding much of the traditional allocation of loss that normally occurred under previous D&O policies.

It’s a sad fact that allocation can often result in disputes between D&O underwriters and policyholders as to how certain elements of a loss, for example, uncovered policies or wrongful acts, should affect the ultimate amount of insurance recovery.

While there is little directors can do to diminish the complexity of the business, legal and regulatory environment in which they operate, a great deal can, and should be done to protect the personal assets of directors through a combination of strong corporate governance, broad corporate indemnification, and implementation of a risk transfer program that includes a high quality directors liability insurance program.



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Directors and Officers Policy Covers Leaders in All Types of Industry

When a legal claim is brought against a director of a company, it is said to be for any actual or alleged act, omission or error judged to be a breach of duty in the discharge of his or her duties. This may be translated as financial mismanagement, or it may mean charges of wrongful termination. Claims often run very high. Directors and Officers for private companies helps cover a company’s legal fees when a lawsuit is brought against a director or officer.

Who Can Benefit

Claims of discrimination or sexual harassment may be brought against an officer of any kind of business. Regardless of the validity of the claim, processing it takes time and money. Affordable D&O policies are now available for companies of all sizes. Typically, an operation must have revenue of at least $500K to be eligible. Businesses that may benefit include:

  • Agriculture
  • Auto Sales and Maintenance
  • Business Services
  • Entertainment/Media
  • Hospitality
  • Retail

D&O Provides Peace of Mind

Many directors in private companies have their own capital ties up into the business. Directors and Officers for private companies helps protect assets that otherwise might be lost to the courts. Another advantage to carrying a policy is that it may make the company more attractive to prospective hires. Having D&O in place lets a candidate know the company is interested in protecting its leaders and allowing them the space to do their job.


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Why Your Business Needs Directors and Officers Insurance

Legal disputes can be quite costly, especially when they involve business operations. Directors and Officers insurance can help protect businesses against legal disputes stemming from wrongdoing. Without such insurance in place, a business can be subject to devastating consequences resulting from lawsuits, which in some cases are enough to leave an enterprise in financial ruin.

Protect Valuable Team Members From Legal Woes

When it comes to business, legal claims can result from a number of issues. Those most vulnerable are the directors of a company, whose personal assets may be at stake without the proper protections in place. For this reason, Directors and Officers insurance is crucial to securing the interests of those members of a company who are the most valuable.

Costly Lawsuits Can Derail an Operation

Another factor in legal disputes regards the costs of launching a defense. Such defenses can require large amounts of money that many smaller and mid-range businesses just don’t have the budget for. These costs can contribute to the decline of a business over time, especially if court proceedings are lengthy affairs.

By initiating Directors and Officers insurance before a lawsuit occurs, you can rest assured that your businesses interests will remain protected. Not only will this save money, it can also protect directors from incurring fallout originating from claims made against them. This is crucial for keeping a business secure and successful for the long-term.


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