Is your business incorporated? Does it have a board of directors and corporate officers? Do you serve on a Board of Directors? If the answer is yes to any of these questions, you could be exposed to suits from shareholders for acts that 'de-value' the corporation. While protection exists under Directors & Officers (D&O) coverage, small and medium-sized corporations often consider it too expensive or unnecessary.

Decisions made by directors and officers impact the viability and value of a corporation. Considering the current issues of accounting practices, reporting and use of corporate assets and the increase in suits being filed against executive boards; this position should be re-evaluated.

D&O coverage should no longer be considered a luxury, but rather a necessity for corporate entities. The coverage supplements the protection provided by General Liability policies since the former responds to legal actions filed by shareholders, customers, scorned merger partners, creditors and regulars.

Board of Directors must take steps to determine that D&O coverage exists. Boards should also identify the level of coverage available for handling defense costs since this expense is handled by the overall policy limits and is not a separate coverage. Criminal acts are not covered by D&O Insurance. However, the cost of providing a legal defense until criminality is determined may be covered.

In the past it was common for a director to handle the risk of a lawsuit by accepting a corporation's indemnification agreement. In other words, a corporation would agree to handle the cost of litigation (and any settlement) out of its operating funds. Today such agreements have little value when the business is in bankruptcy or ceases operations.

The increase in shareholder lawsuits has created a much tighter market for this coverage. Today, corporations needing the protection must be willing to provide detailed financial and operating information to D&O insurers. This information is mandatory and businesses should not let their concern over protecting such data be a barrier to securing this coverage. The stakes are too high.

COPYRIGHT: Insurance Publishing Plus, Inc. 2003

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