Directors’ and Officers’ Liability Insurance

Protection from suits arising out of the management decisions of the board of directors

DON’T NEGLECT A D&O POLICY!

As an officer or director at your organization, you encounter a myriad of employment-related exposures. Sarbanes-Oxley regulatory mandates and increased shareholder activism mean directors are at risk for claims and elevated settlement costs.

The legal cost to defend a director is substantial, as are the potential penalties that can be personally incurred. Due to the personal liability risk—which is not covered under a personal insurance policy—protecting boardroom talent can be a challenge. A directors’ and officers’ liability insurance (D&O) policy is part of a comprehensive risk financing strategy.

D&O FILLS THE COVERAGE GAP

Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a D&O policy specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty. A D&O policy provides defense costs and indemnity coverage to the entity listed on the policy declarations,whichmay include:

  • coverage for individual directors and officers
  • reimbursement to the organization for a contractual obligation to indemnify directors and officers that serve on the board; and
  • protection for the organization or entity itself.

Indemnification provisions are typically included in the charter/bylaws of a corporation. While an important risk component, small to midsize privately held companies or nonprofit organizations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow. A D&O policy can provide an extra blanket of security in the event of a covered loss.

A “fraud” exclusion is typically included in a D&O policy, which eliminates coverage for losses due to dishonest or fraudulent acts or omission, or willful violations of any statute, rule or law.

There are additional forms of coverage to adequately protect directors and officers, including:

  • entity coverage;
  • payment priority for insured persons;
  • severability of the insured aswell as severability of the application;
  • coverage over time, meaning coverage responds to past, present and future directors and officers;
  • pay on behalf clause; and
  • duty to defend clause.

In addition, some D&O polices can be endorsed to provide employment practices liability (EPL) coverage and/or fiduciary liability.

  1. While EPL endorsements under a D&O policy broaden coverage, they often do not provide a duty to defend clause and are subject to a substantial deductible. Many EPL endorsements do not provide for a separate limit of liability in addition to the limit available under the D&O policy. If the D&O limit is reduced or exhausted by payment of an employment practices claim involving the wrongful conduct of an employee, a director’s or officer’s personal assetsmay be at risk.
  2. Fiduciary liability provides coverage for liabilities arising out of ERISA, where fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of alleged errors, omissions, or breach of their fiduciary duties.

CONSIDERATIONS FOR NONPROFITS

According to the Nonprofit Risk Management Center, nonprofit organizations often report some difficulty in affording the cost of D&O insurance. To minimize the annual premium, they recommend choosing only those policy provisions consideredmost critical. If affording a lump sum premium is a concern, inquire about the availability of premium financing. To defray the cost of premiums, some nonprofit organizations consider charging boardmembers a portion of the policy cost.

In the wake of unprecedented corporate scandals in recent years, clearly the trend of corporate accountability applies to large corporations. But privately held companies, including nonprofits, are not exempt from litigation arising out of the management decisions of their boards. They, too, are at risk.

WHO CAN BRING A D&O LAWSUIT?

According to St. Paul Travelers, statistics show that shareholders and employees are the most likely groups to sue private companies. Other parties bringing suits may include corporations against themselves, and a variety of third parties, such as competitors, creditors, regulatory bodies, etc.

WE’RE HERE TO HELP

Since there is no such thing as a “standard” policy, a professional agent is invaluable when purchasing D&O coverage. Call Momentous today to learn more about the appropriate protection against potential directors’ and officers’ liability.

Disclaimer: The above content is a general overview which is provided for discussion purposes only and is not in any way meant as providing recommendations or legal counsel. It is not intended to apply to each circumstance. Because the facts and circumstances of every matter differ and the terms, conditions, exclusions and limitations contained in insurance policies vary, you should review your policy carefully and seek any legal counsel that may be necessary or appropriate.  Momentous is not responsible for any losses or damage resulting from reliance on the information contained herein.

Why a band/entertainer should increase liability limits before a tour

It is clear that the liability exposure to the artists is much higher during a tour. Promoters generally accept the liability for bodily injury and property damage and name artists as additional insureds. There are some cases where the venues also request the promoter add them to the same policy. There are some venues who ask both the promoter and the artist to name them as additional insureds. In essence, there are multiple players involved and all these parties could share limits on a promoter’s policy when a loss occurs.

What happens if the limits are not enough? The artists could be named in the suit and become responsible for the excess limits especially if their negligence can be proven. Even when performance venues don’t require it, touring acts should decide if insurance is a good investment and a better alternative than settling a lawsuit out of their own pocket.

Potential losses could result from:

  • Throwing of objects into the audience
  • Audience members getting rowdy/cause injury to others
  • Negligence caused by fans or the artists
  • Damage/injury caused by the artists’ pyrotechnics
  • Improper or overzealous security
  • Accidents to audience members from collapse of equipment, staging and other venue hazards
  • Improper crowd control before, during and after a concert (e.g. stampedes)
  • Mosh pits (carry their own unique risks)
  • Tour bus collision liability
  • Additional employers’ liability exposure (while touring the band may have more employees than normal which could lead to more injuries)
  • Vicarious/implied liability may result from venue exposures such as food poisoning, slips and falls, faulty merchandise.

In addition to higher umbrella liability limits, the artists may need to secure nonowned aviation liability and event cancellation.

While Europeans are not as quick to sue as the U.S. population, these suits can be filed in the U.S. Some of the risk factors to consider include: the demographics of the audience, genre of the music and style of performance, the venue location, the limits of the underlying policy, and the type of travel between shows.

While there is no formula to determine if the liability limit is enough, the factors to consider are the assets of the artists and the tour exposures. While the artists aren on tour, we believe a $20 Million limit is a good starting number. This could be reduced when they are not on tour, since there are fewer exposures to loss.

Disclaimer: The above response is a general overview which is provided for discussion purposes only and is not in any way meant as providing recommendations or legal counsel. It is not intended to apply to each circumstance. Because the facts and circumstances of every matter differ and the terms, conditions, exclusions and limitations contained in insurance policies vary, you should review your policy carefully and seek any legal counsel that may be necessary or appropriate.  If you would like to further discuss the issues raised here, you may contact Pam Weiser by phone 818-933-2715 or email pweiser@mmibi.com.

Don’t Blog Yourself into a Lawsuit!

(source: IRMI)

The Internet is a fascinating place that is opening up new forms of social interaction, activities, and organization of information. Social networking websites such as Facebook, Twitter, and MySpace are creating revolutionary ways to interact with people all over the world. In addition, websites such as Amazon, Yelp, and Angie’s List allow people to post online reviews of businesses of all types. The explosive growth in these types of activities in the last few years is truly amazing.

These undertakings, however, have a dangerous element. Blogs and postings of a negative nature (even if they are true) can result in unpleasant and costly lawsuits against the author. Note that it may still take time before there is a good body of caselaw to support freedom of speech online in blogs, forums, and social media publishing sites. And remember that freedom of speech does not mean you can say anything you want anywhere. Freedom of speech implies responsibility; its use should generally be for the benefit of the greater good. So the following are some risk management tips to consider before posting or blogging negative comments on the Internet.

Check your facts carefully and thoroughly document your sources. Truth is a complete defense in a libel case, although you still may run into expensive legal bills defending yourself. If you find that your facts are incorrect, remove the inaccurate content and consider issuing a correction or retraction.

If you purchase a product online and have an unpleasant experience with the seller, it might be wise not to post a negative comment or rating on the website. If you do post an adverse comment, be sure that it is objectively written, based on solid facts concerning your own direct experience, and not written in an inflammatory manner. If you are a blog master and someone is posting false and incendiary statements on your site, remember that you may be held liable for these remarks since you are the “publisher.”

Seek protection for your rights. The Electronic Frontier Foundation, a not-for-profit organization, has a mission to safeguard the rights of those who use digital media and to provide legal guides to bloggers both large and small. It also offers helpful ideas to those bloggers and online posters to avoid libel suits.

Make certain your homeowners policy includes a personal injury endorsement to cover libel and slander suits. Most standard insurance company policy forms do not provide this automatically, and it can be added for a small additional premium.  Also, consider buying a personal umbrella policy, which generally provides broader personal injury coverage.

If your blog is a money-maker, look into business liability coverage since the typical homeowners policy contains numerous business-related exclusions and restrictions. If you operate a small home-based business in conjunction with your blog or online business, consider requesting that a home-based business endorsement be added to your homeowners policy.

Get more personal lines insurance and risk management tips and ideas from IRMI.

Copyright 2010
International Risk Management Institute, Inc.

While these tips were carefully researched by our personal lines experts, they are of necessity general in nature and not intended as legal, consulting, or other professional advice. They may also become outdated over time as business conditions and insurance industry practices change. We provide them to you “as is,” and it is your responsibility to assure that the advice they provide is applicable to your geographic area, the insurers you represent, your state’s insurance regulations and environment, etc.

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