Should corporate directors and executives pay more attention to their liability?
Directors and officers (D&O) liability issues affect directors and officers worldwide in terms of their company’s business strategies, corporate philosophies and management styles.
Corporate directors and officers are deemed to stand in a fiduciary relationship with the corporation, and must discharge the duties of their respective positions in good faith and with that diligence, care and skill which ordinary prudent men and women would exercise under similar circumstances.
Along with corporate indemnification, D&O insurance affords personal financial protection to the directors and officers of corporations for their liabilities arising from the business operations of the corporation.
Generally, D&O policies pay loss arising out of “claims” first made during the policy period against directors and officers for “wrongful acts” they may have committed in their capacities as directors and officers.
“Loss” is typically defined to include damages, settlements and judgments. The definition of loss also includes the cost of defending legal proceedings.
Thus, the limit of liability of most D&O policies is inclusive of and depleted by defence costs incurred.
However, some non-profit D&O policy forms provide for defence costs in addition to the limit of liability. Traditionally, D&O policies did not provide for a right or “duty to defend”; however, this is not always the case anymore.
Today, some D&O policies, particularly those issued to non-profit organizations, and some issued to private companies, include a duty to defend. D&O insurance policies are generally written on a “claims made” basis, meaning that the claim must be “first made” against the insureds during the policy period.
Some D&O policies also require that the claim must be reported to the D&O insurer during the policy period or within a limited time period thereafter. In addition, some D&O policies require that the wrongful acts take place during the policy period or after some designated date.
Today’s corporate executive faces widespread liability risks. In the United Sates, these risks arise from a complex array of state and federal laws, both common law and statutory.
Claims against directors and officers can arise from these laws and can involve nearly every aspect of doing business: employee relations, the environment, the level of competition, regulatory compliance, and every other imaginable subject.
Directors and officers are accountable to the corporation, and its shareholders, creditors, employees, customers and competitors, and the government and related agencies.
All of these parties have demonstrated the ability to hold directors and officers accountable, and both the frequency and severity of these claims have increased dramatically over the years. The risk of personal liability can be managed and controlled to some extent, but the liability exposure remains significant.
Even in those cases where directors and officers face frivolous claims, the costs of litigation can be oppressive. In facing the potential liabilities presented, today’s corporate executive can rely to some extent on corporate indemnification.
But corporate indemnification may not be available or appropriate in all circumstances, and even where it is appropriate, the corporation may not be in a position to fund the prohibitive costs of litigation. D&O liability insurance represents the safety net of personal liability for today’s corporate executive.
Scott R. Schaffer is a partner with New York law firm Wilson Elser Moskowitz Edelman & Dicker LLP. Schaffer practises in the insurance coverage area, with a current focus on claims under directors and officers liability, professional liability and employment liability policies.