Sponsored by Zurich
While serving as a board member or executive of a company carries with it great standing, it also invites growing liability for wrongful acts related to business insolvencies, employment decisions, infringement of intellectual property, and botched mergers and acquisitions. New laws and regulations around the world now increase the threat of such litigation for both board directors and company officers. For instance, a number of European countries have implemented changes in their legal systems that make it easier for aggrieved shareholders to collectively bring actions against directors and officers.
If sued in a civil case or by a foreign government agency for alleged wrongful acts, directors and officers can be incarcerated and forced to pay settlements to the full extent of their net personal wealth. The legal defense costs, in addition to the settlement or judgment-related expenses, are borne by these individuals financially.
Domestically, the situation is equally egregious. A recent report by Cornerstone Research and Stanford Law School indicates that almost every acquisition of a large U.S. public company culminates in a lawsuit against the directors and officers.
These growing liabilities are creating anxiety among directors and officers. According to a recent survey, 71 percent of public companies and 50 percent of private companies have significant concerns over the scope of their D&O insurance coverage, while 80 percent of directors and officers have inquired about the financial limits of protection afforded them by the D&O policy.
These concerns are understandable: Few insurance policies are as nuanced as D&O insurance, given its complex Side A, Side B and Side C coverage considerations. A key consideration for directors and officers is to make sure their organizations purchase Side A coverage. The coverage addresses their exposure to financial loss when the corporate organization cannot provide indemnification for various reasons, such as its financial inability to pay the costs, the indemnification is prohibited by law or the company has exhausted the financial limits of the D&O policy. In any of these instances, individual directors and officers remain on the hook for legal defense and other financial expenses.
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