Directors and Officers Liability Insurance
Enron, Bear Stearns, Tyco Ltd, Parmalat, Earnest and Young. Just a few examples of recent infamous directors and officer liability cases
If I had to pick one of the numerous corporate implosions in the past decade it would have to be Enron. I remember sitting in traffic several years ago listening to the radio and hearing about Enron's stock crashing down to .50 cents. Despite the steep stock price drop analysts were still touting and clamoring on about how solid the company remained and recommended listeners buy now while the stock was artificially deflated. If it wasn't for my recent fall out with analyst over their misguides with Polaroid; an investment fiasco I still today keep at the top of my social talking point list, I would have gone home and scooped up a bunch of Enron stock that night. Lesson well learned, as about week later news broke that Enron had been 'cooking the books'; a term newly fabricated from the numerous recent discoveries of corporations hiding debt in order to inflate stock prices and balance sheets.
Out of all the corporate collapses Enron’s downfall was a D&O landmark case and set the stage for several revelations. It exposed thousands of misinformed investors who lost everything. It brought to light the practice of mandating hundreds of Enron employees to invest only in Enron stock for their retirement helping to artificially prop up the stock while eventually decimating their retirement investment accounts and in the end destroying the lives. What it also did, however, is reiterated the importance of Directors and Officers liability insurance.
Prior to filing bankruptcy and before the problems really started to be discovered by the public Enron management boosted their directors and officers liability insurance coverage to $350 million. When the truth about what was really going on at Enron came to light the executives all pleaded innocent and unaware of the illegal activities that caused the collapse of the company. Because they stated their innocents, at the time when the defense began, the Directors and Officers liability insurance companies paid out 20 million to defend them from personal suits filed against them and for one's filed against the company. However, when all evidence was reviewed, some of those executives were found guilty of being in the know and even participating in illegal activities. By the time the trials were over the D&O cost ballooned to several hundred million dollars. A Directors and Liability insurance will not financially defend anyone who is found to have committed illegal acts. Therefore, those executives that were found guilty, further in the trials, of illegal actions were required to pay back all legal costs that the directors and officers liability policy paid for initially.
When the dust settled damages totaled $10 billion- far more than the $350 million Enron had for D&O coverage. Enron may be a severe example of the importance of D&O coverage, but none the less, a perfect example of how important it is to protect a company as a whole from the actions of a few.
private companies Are Just As Vulnerable
As a small or medium private business owner one of the worst assumptions you can take from the Enron case is the same risks do not pertain to my small private business. In many cases this is farthest from the truth, as management is more likely to be involved in more of the day to day decisions in a small business. When management is more involved in business operations it makes it harder to prove they were unaware of questionable practices. Add in less financial resources to defend a smaller company and you have a serious risk to your business survival.
Directors and Officers Insurance - The Definition
Directors and Officers Liability Insurance provides financial protection for the directors and officers of your company in the event they are sued in conjunction with the performance of their duties as they relate to the company. Unlike Errors and Omissions Insurance that protects a company and management from negligence and performance failures related to its products or services, Directors and Officers Insurance is coverage specific to the 'actions' of a company's directors and officers. However, it is a good idea to carry both Directors and Officers Liability Insurance and Errors and Omissions Liability Insurance. Check out our E&O article to learn more about Error's and Omissions insurance.
When Should I Consider Directors & Officers Insurance?
Any company that has a board of directors needs Directors and Officers Liability insurance. Board members won't be willing to risk their personal assets if something should go wrong. It's even more important to carry D&O insurance if a board of directors makes decisions on hiring and firing employees. Most often a D&O policy will include Employment Practices Liability, which protects the company from harassment and discrimination suits, wrongful firing and other employee related issues. Over 50% of D&O claims are employment practices related, so make sure your D&O policy has this coverage and if not; make certain you add it.
At some point you may also want to go public with your company. Investment Banks, Venture Capitalists and other investment entities will most likely require Directors & Officers Liability insurance to be in place before they invest in your company.
As always it's important to remember when buying any kind of insurance for your business to discuss all aspects of your business with your agent. This will insure the coverage you buy is adequate for your specific business needs. Directors and Officers Liability Insurance programs can vary between insurance companies and no one policy fits every business. Talking to your insurance agent will insure you get the proper coverage you need no matter what type of insurance you are buying.