If Elon Musk has taught us anything, it’s that no corporation, public or private, should be without directors and officers insurance.
D&O coverage protects companies and their executives when they get sued over actions they take while running the company.
That would include posting less-than-well-considered Tweets about going private, as the Tesla founder and CEO did recently. The Tweet heard around the world? “Am considering taking Tesla private at $420 – Funding Secured.” Tesla’s stock at first rose on the possibility but then took a nosedive after reports that the SEC was investigating.
Providing false information, failing to respond adequately to a data breach, scandal, or other misconduct can all lead to court action against an executive, especially if any of those items results in a stock drop, a fine, or other financial damages. A board, whose job it is to supervise those in the C-Suite, is similarly liable.
Lawsuits, of course, usually follow a massive stock drop, as they did in the wake of Musk’s ill-conceived Tweet.
While D&O policies won’t cover criminal acts, they will cover judgments and legal fees.
Most publicly traded companies have D&O insurance, and are no doubt happy to pay the premiums. Why? Last year marked a 20-year high for class-action lawsuits by shareholders against companies.
Interestingly, one reason for the increase may be because the lawyers who were busy filing suit in the wake of the 2008-09 financial crisis have finally settled many of those cases and are now able to pursue a new area of alleged mismanagement.
Those lawyers aren’t the only ones going to court; so are the government’s lawyers.
In fact, some believe the SEC complaint against Musk signals a new, aggressive and definitely unwelcome era of SEC enforcement. That’s how John Reed Stark, the former chief of the SEC’s Office of Internet Enforcement, sees it.
“Musk’s tweet was abominable and inexcusable, but having said that, by charging Musk with fraud, the SEC may end up doing more harm than good,” Stark wrote in an article that appeared on the Securities Docket.
“Thanks to Elon Musk and the SEC, we may have now entered a new era of SEC Internet enforcement, where corporate executives may never risk tweeting or otherwise posting any meaningful data or information on social media,” he wrote.
Stark may be overstating things but one way or the other, the argument for D&O coverage is as strong as ever.
Tesla, for one, has said in its corporate filings that it maintains comparatively little D&O coverage. Now facing potentially millions of dollars in civil liability, it’s a safe bet that its directors wish they had more of it.
Not incidentally, it bears repeating that the executives and owners of smaller companies also can find themselves in the cross-hairs, so private companies should consider D&O, as well.
Finally, one thing D&O policies cannot do is protect an executive’s job. Just ask Musk, who was forced to step down as Tesla chairman to settle the SEC’s fraud charges against him.
Jeff Parent is an Insurance Advisor and Registered Professional Liability Underwriter at CCIG. Reach him at JeffP@thinkccig.com or at 720-330-7918.
Note: D&O policies can vary significantly from carrier to carrier, with differences in wording and coverage levels depending on the allegations raised in a lawsuit. As with any financial service, make sure you’re getting the best advice.
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