Director & Officer's Liability Insurance
Directors and Officers of any corporation, whether publicly held or privately owned, are required by law to:
- Act diligently and with due care
- Avoid conflicts of interest and activities that benefit them personally at the expense of the corporation
- Both personally and corporately, comply with the numerous federal and state statutes regulating management and corporate conduct
If directors and officers fail to act properly they may be held liable, depending on the circumstances, to shareholders, employees, customers, creditors, competitors, regulators and other third parties.
Most states have enacted statutes which purport to eliminate or limit certain types of D&O liability exposure. They include permitting corporations to include "indemnification" provisions in their charter documents. However, these statutes vary greatly and require close examination to determine their true benefit. And, none of the statutes create absolute immunity for the directors and officers. For example, a corporation can not "indemnify" its directors and officers for liability they incur as a result of (i) shareholder derivative actions; (ii) SEC based actions; (iii) violations of the "duty of loyalty"; or (iv) liability based on certain federal laws; etc.,. Additionally, a corporation may choose not to "indemnify" its directors and officers for several other reasons including (i) the company is financially stressed or insolvent, and, (ii) the director or officer has fallen out of favor with the company by virtue of a hostile successor board or otherwise.
D&O insurance has traditionally combined two distinct coverages within one policy form. The first insuring clause (often referred to as the "A-side coverage"), directly insures the individual directors and officers for covered losses that they incur as a result of specified wrongful acts. This "personal" side of a D&O policy provides essential coverage when a company is prohibited from providing indemnification or is unable to do so. The second insuring clause (often referred to as the "B-side coverage" or "corporate reimbursement"), in effect reimburses a company for indemnification payments it makes to its directors and officers pursuant to its charters or by-laws or contractual arrangements.
The D&O contract typically applies on an "all risk" basis to claims made and reported within the policy period for Wrongful Acts commonly defined as: "any breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Directors or Officers of the Company in their respective capacities as such, or any matter claimed against them solely by reason of their status as Directors or Officers of the Company, including any Claim arising out of their capacity as a director or officer of an Outside Entity but only if such service is at the specific written request or direction of the Company." The loss that is covered would apply to monetary awards, settlements, and the various costs of defending a claim including legal expenses. Loss does not typically include punitive damages, multiple damages, criminal or civil fines, taxes or matters deemed uninsurable by the law.
TriNet offers insurance as part of an HR outsourcing arrangement or as a stand-alone offering. For more information about TriNet Insurance Services, please call 1-888-842-6805.