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, the legal costs associated with a lawsuit can be crippling for both the organization and your directors and officers. This Risk Insight explores five of the most common sources of D&O liability, while many other risk advisor companies may not have this source of information.
Common Sources of D&O Liability
Employees
As far as common sources of D&O liability go, “employees” is at the top of the list. Most directors and officers are also surprised to learn that their own employees are one of the most common sources of a D&O claim against their organization. In fact, for private businesses and nonprofit organizations, employees are the most common source of D&O claims.
If employees are mistreated during any phase of their employment, they may bring their concerns to the organization’s management team. If employees feel that their concerns have been not been addressed in a sufficient manner, they may see legal action as a means of rectifying their grievances.
Common employment practices claims against directors and officers include the following allegations:
1) Wrongful dismissal
2) Discrimination, including workplace and sexual harassment
3) Breach of employment contract
4) Failure to address health and safety concerns
5) 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
Competitors are an extremely important example when it comes to common sources of D&O liability. 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 even through 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:
1) Breaches of intellectual property
2) Misappropriation of trade secrets
3) Collusion
4) 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 also be held personally responsible.
If debts go 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
- Also 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.
We’re Here to Help
Whether you’re a nonprofit, privately held or even a public company, it is likely that your business can benefit from a D&O policy. Still, there is no such thing as a “standard” policy, a professional broker is invaluable when you go to purchase D&O coverage as well as any other type.
At Metropolitan Risk Advisory, we make it our priority to understand your organization. We’re here to help assist you with customizing policy language to meet your unique needs. What does D&O cover? Still have questions? Still want more info? Contact Metropolitan Risk Advisory today to learn more about the common sources of D&O liability as well as the D&O protection options for your company. Click here for more info at our website as well as a free consultation.
