Directors and Officers 101

Written by Aaron Adam

With the recent demise of many corporations following the economic meltdown of 2008, it stands to reason that an influx of securities fraud lawsuits will soon be hitting the courts as disgruntled investors try to take out their frustrations on directors and officers of these companies, whether they deserve it or not.

The propensity for shareholders' lawsuits against directors and officers of companies has led to a big jump in the number of companies purchasing directors and officers, or D&O as it's called in the insurance industry, coverage. According to industry experts, about 95 percent of Fortune 500 companies held D&O policies. These policies have become increasingly specialized oer the years, and new products are hitting the market at a rapid pace to meet the needs of individual insureds.

D&O history

D&O insurance has its roots in the Great Depression. In the 30s, famed insurer Lloyd's of London introduced a new insurance product that covered directors and officers of companies. The product didn't sell very well until the 60s, when changes in securities law interpretation by the courts made suits against directors and officers more common. As more and more directors and officers saw the potential for their personal fortunes being depleted by lawsuits pertaining to their job performance, they decided to protect their assets with D&O coverage.

The D&O insurance industry has grown by leaps and bounds since then, as the last 30 years have seen an increase in shareholder suits and disputes between federal regulators and D&O insurers. Today nearly 31 percent of all corporations can reasonably expect to have at least one claim filed against the company's directors and officers.

What it does

In general, D&O insurance provides coverage to directors and officers of corporations from claims that may arise from actions related to their position in the company. Directors and officers can be held liable for claims if they hurt their corporation by failing to disclose conflicts of interest, mixing their business and personal assets or by breaching their duties to the company.

For publicly traded corporations, D&O policies primarily exist to offer coverage to directors and officers against shareholder suits. For private companies and non-profits, D&O policies are tailored to mostly cover wrongful dismissal, discrimination and other employment related suits.

The D&O field has greatly expanded beyond the basic level of coverage mentioned earlier, with policies providing a wide variety of options via standard form or endorsement. D&O coverage can extend to many circumstances. It can extend to the cost of defending criminal and regulatory investigations, as well as civil actions. The coverage has become linked in many cases to broader management liability insurance, this form of coverage handles the liabilities of the company as well as any liability that may be assessed against the company's directors and officers.

Typical claimants under D&O policies include customers, regulators, shareholders and competitors who file unfair trade or anti-trust suits. Most companies purchase D&O coverage for their directors and officers as part of their compensation package.

Contrary to popular conception, D&O coverage does not extend to intentional acts of wrongdoing by directors and officers. When directors and officers commit intentionally illegal acts, these actions are not covered by D&O policies. D&O coverage only extends to wrongful acts which are narrowly defined by the policy to regard certain omissions, acts and misstatements made in the insureds' capacity of a director or officer of a corporation.

Claims

In general, D&O policies act on a claims-made basis. This means that the coverage extends only to claims made during the policy period related to events that occurred during the policy period. Claims are defined as a civil, criminal or administrative proceeding or a demand for damages against an insured made in writing. Most D&O policies contain language narrowly defining what circumstances are considered to be a claim. For example, a large number of policies limit claims only to proceedings or demands against a director or officer regarding their capacity as insureds, further limiting coverage by language defining what an "insured" or "wrongful act" constitutes.

How much?

Like any other insurance product, how much D&O coverage your company needs largely depends on the individual circumstances of the folks you want to insure. For example, biotech and pharmaceutical companies tend to carry the largest amounts of D&O coverage because of the propensity of suits against directors and officers of companies in that field. In general, a small private company will usually carry about $10 million in D&O coverage while large publicly traded companies may carry $200 million or more. A qualified insurance broker can help provide a risk analysis and suggest the appropriate level of coverage for your company and steer you to someone who can write a policy that addresses your company's unique needs.