The Basics of Directors and Officers Liability Insurance

Directors and officers liability insurance is a type of business insurance that is designed to provide coverage to the directors and officers of a business. Many times, litigation can arise because of the business-related decisions that are made by these individuals. This coverage is purchased in order to limit the personal liability of the directors of a business when such a situation occurs. Here are the basics of directors and officers liability insurance and how it works.

Directors and Officers Liability

When an individual is charged with making decisions for a Fortune 500 company, this situation comes with a great deal of responsibility. It is inevitable that these individuals will make some decisions that other people do not like. When this happens, someone could bring a lawsuit against this individual. This most commonly occurs when shareholders of a publicly traded company bring up a lawsuit against one of the individuals on the Board of Directors of that company. When this occurs, the individual will be the named party in the lawsuit and will be personally responsible for the judgment.

Liability Insurance

In order to protect the individuals of prominence in a large company, the company will often purchase directors and officers liability insurance for them. This type of coverage will step in and pay for any judgments that are made against one of these individuals up to a certain amount.

The lawsuit settlements that are typically awarded with this type of case are in excess of $10 million. Most individual employees of a company do not have enough money to cover this some or if they did, it would devastate them financially. By purchasing this type of insurance policy, this problem can be avoided for the most part.

Insider Trading Allegations

One of the most common areas in which this type of insurance comes into play is when shareholders accuse prominent individuals in a company of insider trading. This typically happens when a large company's stock price plummets. When this happens, the shareholders in the company are frustrated and believe that it must have been caused by the actions of the Board of Directors. They will often band together and file a class-action lawsuit against one or more of the board members.

Illegal Activity

Even though this type of insurance provides broad coverage for directors and officers, it does not give them a license to act inappropriately. If the individual is engaging in anything that they know is immoral or illegal, the insurance may not provide coverage for them. Typically, an insurance investigation will take place and if the insurance company finds anything that is questionable, they may not be willing to pay benefits.

Part of Benefits Package

Even though this type of insurance coverage is designed to benefit the individuals themselves and not the business, the business will typically pay for the coverage. This is done as part of a comprehensive benefits package that is meant to attractive the best employees that they can find.

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