Resources & Insights

Directors and Officers Insurance: Your Last Line of Defense

October 21, 2016

The number of federal class action securities lawsuits shot up last year to 189, an 11 percent increase over the previous year and the most since the 2008 financial meltdown.

CCIG’s Jeff Parent

Even more dramatically, the total “disclosure dollar loss” of cases filed in 2015 jumped to $106 billion from $57 billion in 2014, an 86 percent increase. DDL is the change in a company’s market capitalization between the trading day immediately before the class action is filed and the end of the period in which plaintiffs can join the suit.

These figures are all from Cornerstone Research, a Boston-based economic and financial consulting firm, offering a clear signal that a growing number of investors in publicly traded companies are unhappy with the performance of their shares.

At the same time, regulators – including those at the Department of Justice and the Securities and Exchange Commission – have been getting more aggressive in pursuing corporate prosecutions.

In fact, the Justice department has said it is now putting greater emphasis on holding individuals even more accountable. What’s more, companies that don’t do all they can to cooperate with investigators could be dinged.

What these developments suggest is that our courts are going to be busy. They also underscore the need for directors and officers liability insurance, because board members and the executives of a firm can be held personally liable for these claims.

“If an individual has been targeted as result of the (Justice department’s) new directive, or an individual finds himself or herself unable to extricate themselves from a prosecution or civil action even after the company has managed to resolve the case against the corporate entity, D&O insurance may represent the individuals’ last line of defense,” Kevin M. LaCroix, a noted D&O attorney, wrote recently.

D&O coverage, also known as management liability coverage, isn’t new but it’s not widely understood. Publicly traded companies with boards of directors (and teams of lawyers) know they can’t live without D&O. But the executives and owners of smaller, private companies are regularly sued, too, and so going without D&O leaves them open to what could be devastating claims.

Specifically, D&O provides coverage against allegations of “wrongful acts.” That can include suits over conflicts of interest, fraudulent financial statements and improper self-dealing.

D&O isn’t for for-profits only. Directors on the boards of nonprofits can be protected from fiduciary liability by obtaining D&O coverage for themselves.

D&O policies typically won’t cover claims arising out of fraudulent acts. However, defendants accused of negligence in preventing or detecting the fraud may be covered.

The good news is that several new carriers have recently entered the D&O market and rates are falling.

Policies also have become more robust, in some cases covering a company’s costs of investigating possible wrongdoing by executives.

These policies offer varying amounts of coverage for various types of allegations. As with any financial service, because they come in various shapes and sizes, it’s important to have expert advice in selecting the right coverage at the right price.

And, as with other types of insurance, a company’s D&O policy should be routinely reviewed to make certain that it meets the needs of the corporation, its officers and directors.

A recent survey found that 36 percent of all organizations reported D&O claims in the last 10 years. With numbers that high, it’s clear that your company’s assets and those of your directors and officers are at risk with every decision you make.

Jeff Parent is an Insurance Advisor and Registered Professional Liability Underwriter at CCIG. Reach him at or at 720-330-7918.

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