Directors and officers liability coverage is important for all medium and small firms. This form of coverage protects personal assets of directors and officers during a lawsuit stemming from mismanagement. When they’re charged with mismanaging the company, directors and officers who don’t have this type of insurance face the risk of significant losses. Directors and officers liability affords them the protection they need, and money for their legal expenses is provided. If the company they work for must be brought into the lawsuit, this coverage may also be extended to include the company itself. There are many other beneficial provisions these policies offer. Keep reading to discover why this coverage is both essential and beneficial.
Directors And Officers Make Mistakes
Nobody is perfect, so it’s important to be prepared for directors and officers to make mistakes. Although most mistakes that require this coverage are the result of negligence, it’s important to remember that anyone is capable of making such mistakes. While training directors and officers to make responsible and ethical choices is necessary, don’t pay so much for training that there isn’t enough money for liability coverage. It’s better to create a healthy balance by both preparing representatives and obtaining coverage to protect them.
Lawsuits May Drive An Unprotected Firm Into The Ground
Unfortunately, many firms don’t implement a directors and officers liability policy. When a lawsuit is filed, the importance of this vital coverage is learned. In this litigious society, there are an overabundance of attorneys who are eager to help individuals or companies sue another party for negligence. If there is proof of the director’s or officer’s negligence, the case will be difficult to win. In a best-case scenario, a good attorney may be able to minimize the amount of damages the company or representative must pay. However, a good attorney is expensive. In addition to this, the damages that must be paid hurt the company’s finances. Some executives or companies are forced into further debt or bankruptcy to compensate for the lawsuit. There are many other smaller expenses that add to the total loss.
The Breadth Of Coverage Is Generous
Many companies forgo liability coverage for their directors and officers because they think it’s too expensive. However, it’s actually very affordable, especially when the many provisions are considered. Each insurance company varies slightly in their specific inclusions. For example, companies that provide basic policies may cover only the attorney’s fees for the company, directors and officers. Some insurance companies that have more extensive coverage may include lodging, travel expenses and childcare reimbursement for defendants who must travel for court proceedings.
The Likelihood Of A Lawsuit Is High
Whether or not a company is in a high-risk business, there is always a high risk for lawsuits against directors and officers. In a recent study performed in 2010, 25% of small firms said they purchased directors and officers liability insurance. About 12% of the executives interviewed stated that they experienced a lawsuit. The average cost of the litigation process was over $200,000. However, some executives reported losses as high as $5 million. This example paints a clear picture of how likely it is to experience a lawsuit. It also illustrates how expensive such legal procedures are.
It’s important to compare insurance companies before selecting a policy. As mentioned before, not all companies offer the same coverage. Comparing rates and provisions is the best way to get the most value for every dollar spent. To determine how much coverage is needed, it’s important to assess risks. Most insurance representatives are happy to provide current and useful resources for this matter. They usually ask a series of general questions. Most agents ask several industry-specific questions also. There are some policies that are better than others for specific industries. Another important aspect of searching for directors and officers liability insurance is researching underwriters. The companies who underwrite insurance policies have varying policies. It’s rare to find two underwriting companies with identical rules. By performing some research on each preferred insurance company’s underwriter, it’s easier to determine which policies are the most solid. Be sure the company is rated with an A. Avoid doing business with insurance companies who use underwriters with lower ratings.