The duties & standards that directors and officers are now held to today are more stringent than ever. These standards, while high, do not always provide the required protection that people need. Today the public, shareholders & employees are more aware than ever of their legal rights when they have been wronged by the actions of directors and officers.
In a nutshell, D&O protects your personal assets as a company owner or manager, including the assets held in your spouses name. The coverage includes legal defense costs whether the claim has merit or not.
Directors and Officers (D&O) Liability Insurance protects corporate directors and officers in the event that they’re personally sued for actual or alleged wrongdoing when managing a company. The insurance helps cover defense costs and damages (awards and settlements) arising out of wrongful action allegations and lawsuits.
D&O Insurance is the financial backing for a standard indemnification provision, also known as the hold harmless provision, which shifts potential costs from directors and officers for losses related to an action they took on behalf of the company.
The coverage reimburses the organization when it indemnifies the individuals and also provides ‘entity coverage,’ which eliminates disputes of coverage allocation if both the directors and officers and the insured organization are named in the same lawsuit.
Why Does Your Construction Company Need D&O Liability Coverage?
There has long been a misconception that D&O claims only really impact public companies. However, all organizations, whether public, private, or non-profit, and the people who lead them are vulnerable.
The costs associated with lawsuits arising from D&O exposures are now so great that D&O insurance has become a necessity for many businesses. Organizations that do not purchase the coverage risk going bankrupt or sustaining losses from which they will struggle to recover properly.
US insurance firm The Hartford states: “Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.”
Employees today are more aware of their rights than ever before, and they’re not afraid to exercise them even if that means pursuing a class action lawsuit.
Losses and Coverage
Business leaders can be held responsible for a wide range of corporate issues. Common claims brought against directors and officers include, but are not limited to:
- Lack of, or poor corporate governance
- Company or stock underperformance
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Failure to comply with laws and regulations
- Making decisions without necessary authority
- Employment practices and HR issues
The list goes on, and as new exposures like cyber liability continue to gain prevalence, the complexity of the risk landscape surrounding directors and officers is growing fast.
D&O Loss Examples in the Construction Industry
Directors of a construction company were held personally liable for the unpaid wages of salaried employees of the company as well as unremitted source deductions and taxes following the company’s bankruptcy.
The chief financial officer and directors of a Craig’s Constructions Ltd. were sued for misrepresenting the financial state of the company to lenders immediately prior to the company's bankruptcy.
An employee alleged that the employer informed third parties that he was incompetent, leading to a hostile work environment.
Following the dismissal of a senior employee, several directors were sued by the individual for defamation after the release of an “all staff” memo describing the dismissal.
Failure to Increase Death Benefit
When an employee died, several directors were sued by the employee’s spouse for failing to increase the limit of the death benefit, as had previously been agreed.
Officers of an insolvent company who told suppliers, “when we get paid, you get paid,” were held personally liable.
At CapriCMW, our Risk Advisors work directly with you to create custom solutions that support your business goals and improve your risk environment. Our approach includes identifying, analyzing and evaluating your exposures to make proactive decisions for transferring, assuming, mitigating or preventing risk.