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The Importance of D&O Insurance

Posted on October 30, 2019 in

As discussed in Part I of this series, directors and officers can be sued for a variety of reasons related to their company roles including breach of fiduciary duty, fraud, misrepresentation of company assets and lack of corporate governance. In Part II, we’ll look into why D&O insurance for directors is essential, since it is the financial backing for standard indemnification provisions, and protects the personal property and wealth of corporate directors and officers and their spouses. 

During the financial crisis of 2008, many boards of directors were caught unaware of their corporation’s fraudulent practices. As bankruptcies became common, especially in banks and other financial institutions, many companies were forced to write off large, uncollectable debts. As a result, consumers tighten up and stopped buying goods and delayed making major purchases. The chain affected nearly every industry, including real estate, tourism, cars and luxury items. Shareholders, creditors and employees were the only option of claiming a dividend in bankruptcy and for many, this meant their only recourse was to file a claim against the company’s D&O insurance policy, which was the last remaining assets. 

The financial crisis also led to new security laws and regulations which require increased communication and transparency to shareholders and the public. Corporate boards must now disclose the details of compensation packages and follow proper authorization procedures. 

These changes have caused board directors and officers to take on a greater degree of personal liability over issues of mismanagement and nondisclosure. According to Allianz, a major insurance company, there has been an increase in the following areas: 

  • Aggressive plaintiff litigation strategies;
  • Increased loss severity;
  • Increased regulatory scrutiny; 
  • Increased financial restatements, and; 
  • Significant D&O claims payments. 

Claims against D&O insurance companies are often multifaceted and highly complex. Even the best-intentioned board of directors and officers can make mistakes, especially given the progression of corporate governance. Directors and officers, along with their spouse, have much at stake from a personal and professional standpoint. 

Before accepting a seat on a board, directors and officers should ensure that the company has a D&O policy and ask a trusted attorney to review it on their behalf. The risk of allegations is higher than ever, as is the cost of claims. Directors and officers shouldn’t underestimate the importance of a D&O insurance policy.