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Overview
and Current D&O Market Trends |
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Who
Needs Directors and Officers Liability Insurance? |
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Liability insurance
for the errors, omissions, and other wrongful
acts of directors and officers has been available
since the early 1960’s. Since that time,
the increase in public awareness and expectations,
and the more litigious nature of society, have
resulted in a virtual explosion of litigation
against corporate managers as well as judicial
analysis of the conduct and standards applicable
to Directors & Officers. The result is that
Directors & Officers are frequently being
“second guessed” by the courts |
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Obligations
of Directors & Officers
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Essentially,
Directors & Officers are considered to have
a duty of care, whereby they follow the “prudent
person rule”, make informed decisions, perform
in good faith, and act in the best interest of
the company. They also have a duty of loyalty
that includes no furthering of personal interests
and refraining from personal action damaging to
the corporation. Finally, they have a duty of
obedience to perform duties within the corporate
charter/by-laws and act in accordance with all
laws, statutes and regulations pertaining to their
industry.
Breach of any of these obligations can incur
personal liability to the individual Director
or Officer involved as well as an allocation of
blame to the other Directors & Officers on
the board, possibly extending to the corporation
itself (80% of lawsuits now also name the corporate
entity as a defendant.) |
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Common
Allegations Against Directors & Officers
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Most allegations
involve decisions, acts, errors or omissions that
have lowered stock values, compromised competitive
industry position, wasted corporate assets, or
overlooked significant growth or investment opportunities.
These can result in financial injury to stockholders,
employees, investors, and any other third party.
In the past, Directors & Officers were somewhat
protected from liability due to the business judgment
rule, particularly in the question of duty of
care. That is, they acted in the best interest
of the company and with due care, honest and reasonable
belief, good faith and without a conflict of interest.
Today, the judgment rule has lost much of its
effect. |
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Recent laws governing employment
have opened the doors to a relatively new category of
potential adversary for Directors & Officers - its
own workforce. Laws such as the Americans With Disabilities
Act of 1990, the Civil Rights Act of 1991, and the Family
And Medical Leave Act of 1993 have contributed to a dramatic
increase in claims involving not only wrongful termination,
but also discrimination and sexual harassment. These laws
are often poorly written and vague, resulting in considerable
time and money expended in each case being interpreted
by the courts. Unfortunately, statistics are indicating
that plaintiffs are prevailing more times than not. In
any case, it is an expensive road to travel for the defense.
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D&O Insurance |
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Ever since entry of domestic
Directors & Officers Liability Insurance in the
1960’s, there has been a lack of uniformity of
policy terms and conditions. There is no standard form
of D&O coverage, and at this time there are over
40 different insurers writing D&O insurance, and
over twice that many different basic D&O policies.
Unlike many types of insurance, where a price comparison
may be made based on similar forms of coverage, D&O
policies must be analyzed and understood if they are
to meet the expectations of the Directors & Officers
as well as the business entity.
As much of importance in understanding what IS covered
by D&O, it is also important to understand what
is NOT covered by D&O. |
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Common Exclusions in Directors
& Officers Insurance |
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Arising out of the Directors,
Officers, or Company gaining in fact any profit or advantage
to which they were not legally entitled. |
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Arising out deliberate fraudulent,
dishonest, or criminal acts |
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Bodily Injury or Property
Damage |
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Discharge of Pollutants |
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Acts committed in the capacity of Director
for any Outside Entity |
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Acts committed as Director of a Subsidiary
that occurred prior to acquisition of the Subsidiary |
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