Why buy director & officer insurance?

Have you been offered Director and Officer (D&O) insurance? Was it explained to you why you might need it? Here is a few examples of claims that would be paid if your organization or business has this special extension of liability coverage.

Breach of Trust

Yours is a non-profit organization and you do fundraisers. For one of your events you got a float or temporary operating funds which would be repaid from the proceeds of the event.

When the money was deposited it went to the wrong account. It was put in the generak account and was used to pay general expenses. This organization then went into bankruptcy and did not have the money to pay back the float.

The organization that lent you the money files a lawsuit against your group. The lawsuit alleges that the directors were negligent in failing to properly supervise the employee who made the improper deposit and resulting breach of trust.

This claim was resolved by way of a negotiated settlement in the amount of $75,000. The costs incurred to defend the claim were approximately $30,000. This type of policy usually has no deductible applied to the damages paid or the defense costs.

Breach of Duty and Abuse of Process

The board of your professional association reviewed a situation and revoked an individual’s membership due to allegations of unethical conduct.

The revoked member sued the association alleging that the board of directors had targeted her and that the board had not followed the organization’s bylaws.

The allegation about the targeting of the member did not appear to be supported by the facts but the bylaws were somewhat ambiguous. This ambiguity in the wordings made it a difficult case to defend so a settlement was negotiated. This was done in part to avoid embarrassment or loss of reputation to the professional association.

There was $100,000 in defense costs and the amount of the settlement paid. Again there was no deductible paid by the professional organization on either the defense costs or payment of damages.

Wrongful Dismissal Claim

These claims are becoming more common. In this claim a senior executive’s employment was terminated because several employees complained about the executive’s behavior. The dismissed executive was alleged to have shown harassment and sexual misconduct to these employees.

The terminated executive sued the organization for wrongful dismissal, and sued the directors and officers for alleged interference with contractual relations.

In this case the executive succeeded at trial, but then the the insurer appealed the decision of the trial judge and won the appeal. This resulted in no damages paid to the executive.

The total defense costs incurred were approximately $250,000. Again was no deductible applicable to this loss.

So you have to ask yourself, "do you feel lucky?". Remember, insurance is used for the things that you cannot control or avoid. What impact would these cases have on your business? Talk to your agent or broker. Take control of your insurance.