Directors and officers bear immense responsibilities in their companies. They are the architects of strategic decisions, the stewards of shareholder interests, and the guardians of a company’s vision.
Yet, this level of responsibility comes with many challenges; directors and officers face a variety of risk exposures as they steer their organization forward through an ever-evolving industry.
Directors and Officers (D&O) insurance claims revolving around environmental liability, data breaches due to inadequate cybersecurity measures, and failure to maintain adequate financial information from nonprofits are just some of the many and nuanced D&O claims that we are seeing today.
Despite the misconception that D&O insurance is not needed, D&O insurance is an effective shield against liability claims. This article will explore the five most common risks for directors and officers and how D&O insurance is still the most vital tool for risk management.
1. D&O Claims Pertaining to Cyber Attacks
The digital transformation of businesses has opened up new avenues for cyberattackers to exploit a company’s software and IT vulnerabilities. From ransomware attacks to data breaches and social engineering scams, cyberattackers’ tactics have become increasingly sophisticated.
As a result, companies — regardless of their size or industry — are at risk of experiencing a growing number of cyberattacks in the coming years.
In 2020 alone, an estimated 700,000 cyberattacks on small businesses amounted to nearly $2.8 billion in damages. When a cyber-attack occurs, it often has negative consequences for a company’s leadership, particularly its directors and officers, in the following ways.
- Legal and regulatory action: Directors and officers are responsible for ensuring that their organizations comply with relevant laws and regulations such as GDPR and other consumer privacy laws by state. Depending on the nature of the company, regulators expect that the organization has adequate cybersecurity measures in place to protect consumer data. Non-compliance can lead to fines and legal action when a cyber attacker has gained access to sensitive data. You can read data breaches from some of the most well-known companies here.
- Trade secrets: Sometimes, a data breach can expose a company’s trade secrets. If a company has partnerships with other organizations, then this exposure of a company’s trade secrets can lead to a D&O claim for not having adequate cybersecurity measures in place.
2. Environmental Liability D&O Claims
In the context of extreme weather events, rising sea levels, and more, businesses and their leaders are facing increased scrutiny and legal action regarding their roles in contributing to climate change or failing to mitigate its impact. Here are the most common climate-related risks for directors and officers.
- Regulatory changes: Governments around the world and nationwide are enacting stricter environmental regulations. Companies that fail to comply with these regulations face legal liabilities. Regulators expect directors and officers to stay informed about evolving environmental laws and ensure their organizations remain in compliance.
- Misleading statements: One of the critical drivers of climate-related D&O claims is misleading information by company executives regarding their environmental practices. Investors, stakeholders, and the public are increasingly demanding transparency and accountability. If a company fails to disclose relevant information, directors and officers can find themselves legally liable and face costly penalties.
- Failure to adapt: As climate change-related risks rise, regulators expect companies to adopt environmentally friendly practices, such as transitioning from a carbon-based energy source to a carbon-neutral energy source. Failure to take adequate measures to reduce a company’s carbon footprint or prepare for the effects of climate change can result in regulatory fines and legal liabilities.
3. D&O Shareholders Claims
Shareholders are a critical component of any publicly traded company; they invest their money in the hope of seeing returns, and they entrust corporate leaders, such as directors and officers, to make decisions that will maximize the value of their investments.
When shareholders believe these leaders have failed in their duties, disputes can arise, leading to D&O claims.
Shareholder claims are the most common type of D&O claim for publicly held companies, and nearly 70% of publicly held companies had a shareholder lawsuit from the years 2,000 – 2,011. The most common shareholder claims include:
- Securities fraud: Shareholders may allege that the company’s leaders misrepresented information, leading to financial losses for investors.
- Breach of fiduciary duty: Shareholders might claim that corporate leaders breached their duty by prioritizing their interests over those of the shareholders.
- Corporate Mismanagement: Shareholders may claim that the company’s leadership made poor business decisions, resulting in financial losses for the company and its investors. For example, significant drops in stock prices have led to D&O lawsuits.
4. Employee-related D&O Claims
Another common D&O claim for officers and directors is related to employees; this can occur for various reasons, such as discrimination, sexual harassment, and other employment-related issues.
Employee-related D&O claims can be complex. For example, during the pandemic, lawsuits relating to employees’ vaccination status rose. More commonly, employee-related D&O claims occur within nonprofit organizations.
Although their commitment to a noble cause often takes center stage, nonprofits are similar to other business entities — they must also navigate the complexities of management. Here are common D&O claims occurring with nonprofits:
- Volunteers: Nonprofits often rely on volunteers to fulfill their mission. While volunteers are essential, they can also introduce certain risks, such as accidents or injuries that occur while volunteering. Directors and officers may be held responsible if they fail to implement adequate volunteer safety protocols.
- Employment practices liability: Nonprofits must adhere to strict employment laws and regulations. Discrimination and sexual harassment can lead to legal action.
- Misappropriation of funds: There can be situations where employees misappropriate donor funds. Nonprofit leaders, such as the board of directors, can be held responsible for not implementing adequate financial safeguards.
5. D&O Claims Relating to Competitors
Competition is a critical component of the business world. While healthy competition is a driving force for innovation and growth, it can also give rise to disputes and legal actions. Here’s how competitors can become the source of D&O claims.
- IP for product development and innovation: Competitors may unintentionally infringe on existing patents or copyrights in the race to develop innovative products or services, which can result in companies taking legal action regarding their intellectual property (IP).
- False advertising: Misleading or false advertising claims can result in D&O litigation, especially if a competitor believes it has negatively impacted their market share.
The Importance of D&O Insurance
D&O insurance is a critical component of risk management for businesses. It protects the personal assets of a company’s directors and officers while serving as a safety net for the organization. D&O insurance provides coverage for:
- Legal defense costs: One of the primary functions of D&O insurance is to cover the legal costs associated with lawsuits, which include: attorney fees, court costs, and settlements.
- Personal asset protection: D&O insurance protects the personal assets of directors or officers, such as their homes, savings, legal fees, and other investments, in case they are liable for alleged wrongful acts.
- Coverage for breach of fiduciary duty: D&O insurance typically covers claims related to breaches of fiduciary duty, mismanagement, errors in judgment, and other allegations of wrongful acts in the company’s management.
In conclusion, D&O insurance is an essential safeguard for both the individuals who lead an organization and the company itself. D&O insurance empowers leaders to make informed decisions, attracts top talent, ensures compliance with the law, all the while serving as a vital risk management tool for a successful business and business plan.
As a leader in specialized insurance, Quaker Special Risk provides D&O insurance solutions tailored for nonprofits, private companies, public companies, individuals starting a business, a corporation in transition, and more. Contact us to learn more about our Directors & Officers Insurance today.