You Can Be Found Personally Responsible for Your Business Decisions
As a director of officer, you’re at risk every day with what you do. Limited or imperfect information and tight deadlines add to the overall complexity of the decision-making process and can lead to poor outcomes or even outright mistakes.
Consider the following:
- A minority shareholder in a family-owned electrical contracting business sued the two major shareholders on behalf of the company, claiming they breached their fiduciary duties. The minority shareholder claimed that the majority shareholders, by drawing excessively large salaries and bonuses, caused the company to lose money. The court ruled in favor of the majority shareholders, but the defense costs amounted to six figures.
- A mid-sized manufacturing firm hired an employee away from one of its competitors, bringing the person on as an officer. A year later, that new officer’s ex-employer sued the officer and his new firm, alleging that the officer misappropriated trade secrets and violated certain provisions of is termination agreement.
- The plaintiff filed a complaint against their competitor alleging that a former employee, now working at the competition, engaged in unauthorized use of confidential and proprietary information and committed other acts of unfair competition. As a result, the plaintiff alleged it has suffered irreparable and immediate injury. In addition, the plaintiff alleged that the defendant has possession of its confidential information and intellectual property.
- The federal government sued the CEO, the president and other officers of an East Coast manufacturing company for price fixing. After an extensive trial, the allegations were dismissed due to lack of evidence, but the defense costs and fees incurred approached $1 million.
- A company enters into an investment agreement with a third party and agrees not to negotiate with any other entity regarding financing or a potential acquisition for a two-week period. During the exclusivity period, the company engages in negotiations with another investment group. The third party alleges breach of investment agreement and intentional and negligent misrepresentation.
These are just some of the many ways you and your company can be sued for operating your business. The difficult and dangerous part is that these claims are not covered by your General Liability Insurance policy and defense costs alone can be in the hundreds of thousands of dollars. Most businesses cannot pay that much to defend a lawsuit and expect to stay in business. Do you want a competitor to put you out of business over a frivolous claim because you can’t afford to defend yourself in court?
Also, to hire and retain talented directors and officers, companies need to give them the freedom to make corporate decisions without the fear of being personally liable for losses stemming from those decisions. Directors & Officers (D&O) insurance protects executives against the consequences of any alleged or actual “wrongful acts” they commit while performing regular supervisory duties. Without D&O coverage, executives’ personal assets are at risk in the event of a lawsuit.
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Keep in mind that there are some limitations to D&O coverage. It does not cover cases in which fraudulent, criminal or intentional wrongful acts are committed, or when acts are committed for personal gain. But no matter the size of your company, costly mistakes made by directors and officers can happen, which is why it’s important to take steps to ensure your executives against losses stemming from an incident. Contact Robertson Insurance & Risk Management today to learn about the D&O coverage solution that’s right for you.