Directors & Officers Liability: Critical protection for your board and management team

Directors & Officers Liability coverage is critical, even for privately held corporations, since the owners and management team have no other direct protection for claims involving alleging a wrongful act in the performance of their duties as directors, officers, or managers. Even though privately held corporations experience fewer shareholder suits than do publicly traded companies, there is a wide range of claims for which their directors and officers can be held personally liable and where indemnification is prohibited by either the corporation’s by-laws or by public policy. 

The directors and officers of privately-held companies can be held personally liable for claims brought by individuals or the government for alleged violation of:

• anti-trust laws and trade regulation laws (Sherman Act, Clayton Act, Robinson-Patman Act, Federal Trade Commission Act and various similar state antitrust laws)

• the Occupational Health and Safety Act

• environmental laws including CERCLA ("Superfund"), Resource Conservation and Recovery Act and various similar state environmental laws

• employment laws (Fair Labor Standards Act, Age Discrimination in Employment Act, Equal Pay Act, Equal Protection claims and various similar state laws)

• federal and state tax laws

• RICO

• federal and state securities laws

• laws protecting intellectual property (patent laws, copyright laws and federal trademark laws)

Even though the corporation’s by-laws provide for indemnification of the directors and officers, there are many instances in which indemnifications will not be permitted, for example, in the case of a derivative suit by shareholders. And in any case, the cost of indemnifying directors and officers for defending these claims and paying judgments can be staggering. Directors & Officers Liability insurance transfers this financial risk to the insurer.

And, in many cases when individuals need protection the most, the company may be financially unable to make good on its promise to indemnify the individuals against the cost of defending a claim or the payment of damages awarded by a court.

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