Director’s and Officer’s Liability (D&O)
This policy pays on behalf of a Director and Officer a loss resulting from a wrongful act, which the D&O is legally obligated to pay and is not indemnified by the Insured Organization. It will also pay on behalf of the Insured Organization the loss for which the Insured Organization has granted indemnification to such Director(s)/Officers(s) as and to the extent permitted or required by the applicable law. Continuity of the D&O Insurance Program is essential. In discussion with the D&O underwriters a pure standalone entity cover is not readily available in Canada. However, Insurers are prepared to include a Priority Payment Endorsement on behalf of the Directors & Officers coverage. This allows Directors & Officers to be indemnified first. The remaining limit can be used for the Entity coverage. This addresses the underwriters concerns: conflict as to which insurance will apply, one defense team for D&O and Entity, no allocation of limit issues between the Directors & Officers and the Entity, policy is specific as to what wrongful acts are covered under securities, 100% of defense costs are covered if it is just misrepresentation, Priority of Payment Endorsement ensures the Directors & Officers maximizes their indemnity.
Surprisingly, few directors and officers of privately held corporations fully understand their personal liability exposure as interpreted by the courts. Directors and officers’ personal assets are at risk from these suits that may contain allegations such as fraud, antitrust, unfair trade practices, defamation or breach of contract. Usually directors and officers will have indemnity provided by the company for amounts that they are held liable. However, indemnification is not always available. Indemnification can be limited for reasons such as financial insolvency of the company and may be prohibited by law or indemnification provisions, and/or contrary to public policy or statutory limitations. The majority of the suits are brought by shareholders. Allegations of wrongdoing are many and varied, with the only limitation being the imagination of the accuser. Some of the obvious include: breach of duty, mismanagement, conflict of interest, self-dealing, conspiracy, discrimination, etc. As for shareholder claims, just because the corporation is not publicly traded does not mean that it has not issued a “security” that is subject to U.S. securities laws. In fact, directors and officers of privately held corporations owe the same duties to shareholders, as do their counterparts at publicly held corporations. It can even be argued that directors and officers of privately held corporations are more at risk of claims because they simply do not have the same resources as large publicly held companies, so that their decisions are made without full or accurate information.
Key Areas of concern:
Allegations arising from employees against directors and officers have been dramatically increasing over the past few years. This is especially true with regards to employment practices issues such as wrongful termination, discrimination and harassment. While we recommend that every company protect itself financially with an Employment Practices Liability Insurance policy, it is important to note that a Directors and Officers Liability Policy can provide protection against these types of allegations for the individual directors and officers as well.
Consideration should be given to the number of shareholders or debt holders of the private company and the amount of the dollars invested. Obviously, the more stock that is held outside of the founders and insiders, the greater the risk of litigation.
Mergers and Acquisitions:
This activity can also give rise to distinct securities claims, allegations of fraud, and various contractual liability issues. Anytime a valuation is made there are always grounds for a challenge. These challenges frequently occur just prior to an entity’s IPO or merger. Additional shareholder litigation can arise from situations such as private placements, hostile takeovers and failure to complete an IPO.
Strategic Partners/Distributors: Directors and officers of privately held corporations face claims by any party with which the corporation contracts or even discusses a contractual relationship. The strategic partner or distributor creates numerous exposures to just such suits in addition to allegations of unfair business practices. Because many contracts and other negotiations for privately held corporations are handled by officers of the company, officers are personally at risk for claims arising out of these negotiating activities.
Claims made against directors and officers for copyright, patent and trademark infringement are ever increasing. In addition, it is not uncommon to see allegations of wrongdoing against directors and officers that involve the hiring of competitors’ key personnel and the proprietary technology or information that follows.
Claims of environmental contamination to employee health and safety are being brought by government agencies directly against the directors and officers of privately held companies. Violations of regulatory acts, monopolistic behaviour, and numerous other charges are all issues that can create additional liability for the company and directors and officers as individuals.