Directors and Officers Liability Insurance

April 3, 2014 // Rick Gossett

Directors and officers (D&O) insurance is purchased to cover the CEO, COO, CFO, other corporate officers and outside directors. The coverage is specific to actions of the individuals, rather than to actions of the company. It applies whenever a claim is brought against one of the covered individuals for an action arising out of performance of their duties. The officers and directors will generally be covered so long as their actions are intended to be in furtherance of the interests of the company.

D&O has become a necessity for companies on a path to go public. The reason is that knowledgeable, high-profile directors are a huge plus when presenting a company to the investment community. Potential directors almost always insist on ample D&O coverage. This is particularly true in the high-tech field, where securities tend to have high volatility. The landscape is littered with class action suits against high-tech firms who have stumbled. The strike lawyers will almost always name the individual officers and directors as defendants in their suits.

Public companies pay hefty fees for D&O coverage because of the threat of shareholder claims. Smaller companies have historically stayed away from D&O coverage because of its cost.

While smaller companies don’t have the same exposure to shareholder actions, they have a very real exposure to employee actions. These small and mid-size firms often combine D&O coverage with EPLI (Employee Practices Liability Insurance) coverage.

EPLI covers the following types of claims:

Wrongful termination
Harassment
Retaliation
Discrimination
Wrongful discipline

If there is one factor that should motivate a business to purchase D&O and EPLI coverage, it’s the cost of defense. Many seemingly frivolous suits have cost companies hundreds of thousands of dollars in legal fees. The ability to fund a defense and funds to negotiate a settlement go a long way to provide piece of mind to corporate officers and directors. Very liberal indemnities in the bylaws and employment contracts may prove of little value if the company is strapped for cash. That’s when the insurance coverage is even more essential.

Rick Gossett

Rick Gossett has been COO of Tarkenton Companies for more than 20 years and is an expert in business operations, responsible for business software development, unique partnerships, business educational content, consulting, and more. Rick was the originator of Tarkenton Companies’ consulting services and, initially, personally answered every question. Before joining Tarkenton Companies, Rick owned and operated a private practice as a CPA. Prior to that, he was a Senior Manager at Pannell Kerr Foster in tax and audit, as well as Principal in Ernst & Young’s small business advisory group.