As an officer or a senior manager responsible for the decision-making of a business, a small mistake can have huge consequences. There is a probability that your decisions may hurt or cause some damage to your customers, employees, investors or any other stakeholder involved. This responsibility of the individuals at the higher level in an organization is called a fiduciary duty. And, when this duty is breached, individuals can be held liable for defense and settlement costs. Directors and Officers Insurance protects the company and the individual from this grim situation. In the article below, we shall look at some of the common Directors' and Officers' insurance claims.
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Directors and Officers Liability Insurance at a Glance
Director and officer insurance, or D&O insurance, provides liability coverage for directors, officers and managers of a company. It protects them from claims that may arise from actions or decisions taken on the company’s behalf as part of their duties. Claims leading to lawsuits are generally expensive, thus, directors’ liability insurance covers the cost associated with them.
Also, due to the complex working environment and potential risks involved, good D&O insurance has become essential in attracting and maintaining top managerial talent. This business insurance reimburses the defense cost, financial damages, settlement expenses, etc., resulting from alleged wrongdoing.
Common Directors and Officers Insurance Claims
Directors and officers of a company have a huge task in hand. Regardless of their expertise, knowledge, ability to handle situations, decision-making skills, and experience there might be instances when they face litigations. Some of the common directors’ and officers’ insurance claims may include:
Employment and HR-related Claims:
Employees can sometimes claim against the managers or directors because of termination or working conditions. There have been quite a few instances wherein the senior personnel of an organization is accused of mistreating or violating rules or laws, that may harm an employee.
The role of a shareholder cannot be dismissed. While every company may try to be as transparent in their work as possible to avoid confusion, there may be instances when they are accused of wrongdoing. Shareholders may claim that the director(s) are misusing funds or are not being transparent in their way of working. This may lead to expensive lawsuits.
Law Infringement Claims:
Every business needs to function within the set laws of a country. Any infringement of these laws may lead to sharp consequences. These breaches of laws may be caused due to error in judgment, misunderstanding of the law, ignorance of the subject etc. In any conditions, law infringement claims can have a huge impact on the directors and decision-makers of a company.
Reporting Error Claims:
Directors are usually the face of the company. They are responsible for making decisions and sharing them with the public. When the data shared with the stakeholders is inaccurate, wrong, or insufficient a lawsuit may be filed for misrepresentation of the company’s real picture.
This type of claim is very common for manufacturing units, especially in chemical industries. A claim may be filed against the directors or officers for the release of pollutants. For example, a chemical factory has leaked sewage at an adjoining ground or waterways, causing trouble and damage to the nearby population. The people may decide to file a claim against the directors of the company to recover their losses.
Regardless of the size and ownership of the business, the directors’ and officers’ liability insurance has become an important business insurance that cannot be ignored. Startups and smaller firms may believe that they do not require D&O insurance, but this is not necessarily true. The directors' and officers' insurance claims leading to costly lawsuits and legal costs have made smaller or mid-size companies sit up and consider opting for this insurance.
Written By: PolicyBazaar - Updated: 11 August 2023
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