5 Common Sources of D&O Liability

Regardless of your company’s size, having a D&O policy can be beneficial.

In today’s business climate of corporate transparency and accountability, an organization’s officers and directors face a myriad of employment-related exposures. Regardless of your company’s size or mission, a lawsuit can be distracting for management as well as financially crippling for the organization and its directors and officers.

Let’s explore five of the most common sources of directors and officers (D&O) liability.

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Employees
Most directors and officers are surprised to learn that their own employees can be a source of a D&O claim against their organization. In fact, for private businesses and nonprofit organizations, employees are the most common source of all D&O claims.

If employees are mistreated during any phase of their employment, they may bring their concerns to management. If employees feel that their concerns haven’t been addressed in a sufficient manner, they may seek legal action as a means of rectifying their grievances.

Common employment practices claims against directors and officers include the following allegations:

Wrongful dismissal
Discrimination, including workplace and sexual harassment
Breach of employment contract
Failure to address health and safety concerns

Government and Regulatory Authorities
Governmental and regulatory authorities exist to monitor the environment in which organizations operate. These bodies help ensure that directors and officers and the organizations they control conduct their activities in a fair and lawful manner.

Government and regulatory bodies monitor compliance with a broad range of laws, including the following:

Corporations law: Governs the ownership and management of organizations
Securities law: Governs the administration of publicly listed companies
Consumer protection law: Governs the way in which organizations distribute products and services to consumers
Occupational health and safety law: Ensures that organizations maintain a safe workplace
Taxation law: Governs the taxation of organizations and individuals
Environmental law: Ensures that industry participants adhere to environmental restrictions

For directors and officers, the enforcement power held by these bodies presents a significant exposure to D&O claims. If regulators discover that wrongful conduct has occurred, they may pursue legal action against the organization and the executives involved.

Competitors
As organizations attempt to grow their market share, management teams must ensure that growth is achieved through fair business practices. If an organization’s competitors believe that they have been unfairly disadvantaged by dishonest or illegal behavior, they may seek recourse through legal action.

Directors and officers can be brought into legal actions for a range of perceived wrongdoings, including the following allegations:

Breaches of intellectual property
Misappropriation of trade secrets
Collusion
Anti-competitive behavior

What’s more, directors and officers may also be held liable for actions that are perceived as misleading or defamatory, with claimants seeking damages for their perceived losses.

Creditors
The management team of an organization has the responsibility of monitoring the organization’s financial position and its ability to meet debt obligations as they become due. If an organization becomes insolvent, creditors will often scrutinize the decisions of directors and officers to see if they can be held personally responsible.

If debts are left unpaid when an organization goes into liquidation, creditors can pursue executives personally in an attempt to recover outstanding funds. Common allegations by creditors against directors and officers include the following allegations:

Breach of fiduciary duty
Breach of duty of due care
Negligence
Deliberate misconduct

Shareholders
Due to their financial investment, shareholders have an incentive to monitor an organization’s ongoing performance and ensure that directors and officers are acting with the organization’s best interests in mind. With potentially large sums of money at stake, if shareholders are not pleased with an organization’s direction, they may take measures to protect their investment.

If it appears that management has breached their duties to the detriment of an organization, shareholders may bring a claim against those directors and officers.

Whether you’re a nonprofit, privately held or a public company, it is likely that your business can benefit from a D&O policy. Since there is no such thing as a “standard” policy, a professional broker is invaluable when you go to purchase D&O coverage.

At HRO Resources, we make it our priority to understand your organization and assist you with customizing policy language to meet your unique needs. Contact us to learn more about D&O protection options for your company.