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Do I need Director’s & Officer’s insurance?

Business Insurance

By Joanne Lemna | June 27, 2016

Whether a for-profit business or a non-profit organization, your directors and officers can be sued for a number of reasons. They can choose to get directors and officers’ insurance to protect themselves or an organization can purchase a policy to protect board members and executives. The organization should also create a risk management strategy to minimize the chance of a lawsuit and what to do if a situation arises where one may occur. This type of lawsuit can be expensive and damage the organization’s public image.

How to protect your organization.

In today’s competitive environment, directors and officers are expected to make fiscally responsible decisions for their organizations while adhering to high standards and performance expectations. In doing so, directors and officers often attract a great deal of attention to their actions—attention that can turn litigious quite quickly. Directors and officers of an organization are at particular risk as they are the faces and names associated with the organization’s public decisions and actions.

As a result most organizations now carry director’s and officer’s liability insurance. Known simply as D&O insurance for short, this type of policy coverage protects your organization’s decision-makers from being held personally liable and fiscally responsible for decisions made in the course of conducting business.

Risks of not having insurance

A common misconception about D&O liability coverage is that it’s only for large companies that need protection from shareholders. But this couldn’t be further from the truth. A recent study by Chubb Insurance found that 43% of D&O lawsuits came from customers and 29% from regulatory agencies, while stockholders accounted for only 11% of all D&O claims.

With no D&O coverage in place, your organization’s directors and officers run the risk of having to pay legal defence settlement and judgment costs out of pocket. Even if your organization were to step up and pay these bills defence costs alone can create such a large financial burden that it can easily strain a company’s accounts or prompt corporate bankruptcy.

Whether the risk is from competitors lodging antitrust or unfair competition claims or regulatory agencies launching costly investigations (like the recent Ontario case where the Competition Bureau went after more than 140 condo boards due to possible price-fixing)  a liability suit can expose your director or officer’s personal and business assets and add a level of stress and financial strain to your organization.

But D&O insurance eliminates these concerns. With adequate D&O coverage, the potential burden of legal fees and restitution for a hit taken by the director or officer or their family or estate is taken care of plus your organization can rest easy that these costs won’t be taken from the accounts and the day-to-day funds used for your organization but are covered by your D&O insurance.

But to be truly protected you need to be proactive

While D&O coverage is essential in attracting qualified directors and officers to work with your organization it’s not the only tool in your toolbox. Your organization should also proactively provide training on negligence and liability to all directors and officers and make sure that everyone on your organization’s board or management team is aware of the risks associated with their roles.

One great way of making sure that directors and officers conduct themselves in a transparent and ethical manner is to create and provide formalized rules and procedures that they can refer to when dealing with the organization’s operations and affairs. Also, establish clear financial reporting guidelines and remember to store confidential materials and sensitive information in a secure place.

How Insurance Works

Now for most organizations, your premiums will be determined based on the probability of whether or not a claim will be made on that policy. That means your organization’s premiums will be based on the national statistics your insurer has on file for similar organizations—so rates will be set based on industry standards not solely on whether or not your organization has ever had a claim or a problem.

What to do once you get your D&O policy

Once you get your policy—and each year when you get your renewal—remember to review the document. Make sure you understand: what is covered (and not covered) who is covered and who is not covered. For instance, your volunteers may be covered but anyone working a special committee may not. If anything is unclear call your independent insurance advisor and ask for help.

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