Primary Sources of Liability for Directors and Officers

Not only can it be lonely at the top, as the old adage contends, it can be fraught with liability. When high-level company staff-that is, directors and officers (board members) of an organization-perform their duties in their capacity as senior management, in doing so they can be at risk in the event they commit a wrongful act.

Coverage offers protection for wrongful acts at the top

Directors and officers insurance, also known as D&O insurance, is designed to protect directors and officers from for personal liability or financial loss stemming from wrongful acts they may commit while functioning in their capacity as directors and officers. For example, if the chief financial officer of a firm absconds to parts unknown-and takes all the money in the company coffers with him-the remaining board members and other senior-level staff would be covered in the event they were sued over the matter. Essentially, the coverage works to protect directors' and officers' personal assets and ultimately, the company's assets.

Some companies offer the optional coverage to be added to the Directors and Officers policy to cover risks stemming from employment practices (Or, in many cases, Employment Practices Liability insurance can be purchased.) This coverage provides liability protection stemming from matters such as sexual harassment, discrimination, or wrongful termination lawsuits.

Claims are likely to come from a variety of business activities and developments

Do you know where are the biggest risks of D&O claims? For partners and members, as well as shareholders and investors, the major sources of claims could arise in any of these situations:

Mergers and acquisitions

Financial performance and financial reporting

Matters of executive compensation

Conflicts of interest issues

Bankruptcy

Insufficient or incorrect disclosure

Stock or other such offerings

D&O claims brought by clients and consumer groups are most frequently based on the following:

Granting or refusing to grant credit

Collection of debt

Unfair or deceptive trade practices

Dishonesty

Disputes over contracts

Issues over the quality or cost of a product or service provided

Lender liability

D&O claims can also arise from competitors and other third parties, particularly stemming from the following practices:

Infringement of copyright or patent

Defamation

Business interference and other competitive disputes

Breaches of antitrust

Potential acquisitions

Taxation

Regulatory and other government-required policies