An investment into D&O insurance is prudent for both for-profit and non-profit organizations. Your directors and officers are susceptible to significant personal loss regardless of whether or not your company is posting thousands or millions in revenue if there are allegations of mismanagement of the company’s affairs. Smaller businesses may have the biggest disadvantage because their finances are often not able to overcome litigation or rebound from a settlement. For this reason, D and O insurance is an important coverage.
The Reasons for Litigation
Even though their roles are often behind the scenes, the decisions made by a board of directors or by the officers of a company have a direct impact on the successes and failures of the company. Insurance coverage usually protects the company but leaves directors and officers exposed to lawsuits against themselves as individuals for their role in operations. Lawsuits are brought for a number of reasons, some of which include:
- Misrepresenting the company’s assets
- Breaching fiduciary duties and causing bankruptcy or financial losses
- Failing to comply with workplace laws
- Lacking corporate governance
- Committing fraud
- Misusing company funds
- Stealing intellectual property or a competitor’s customers
A D&O policy keeps individuals and their wives from being held personally responsible for alleged or actual wrongful acts that occur while managing a company. However, these policies do not protect the individuals when the actions taken were illegal.