Common D&O risks and claims
Officers and directors can become personally liable in a number of ways. Here are few examples of real-life scenarios that can lead to the filing of D&O related lawsuits:
Failure to comply with workplace laws
A female employee was terminated at work due to gender discrimination, and the directors or officers and company were then sued on the basis of wrongful termination.
Theft of intellectual property
A department head left his company to start a new firm. His former employer sued him, together with his new firm, presenting evidence of the former employee using proprietary software and corporate licenses that originally belonged to his previous company.
One company closed a large contract with a customer. Stated in the contract, the company should present financial and human resource assets to satisfy work requirements. The board of directors misrepresented the company by altering revenues and workforce assets. The customer filed a lawsuit due to the misrepresentation.
Breach of fiduciary duty
Investors sued a company for breach of duty after a project was awarded to a third-party contractor whom they believed to have personal connections to the officers and directors of the company. Pursuing their personal interest and not the company’s betterment, a lawsuit was filed for not properly investigating the qualifications of the winning contractor.
D&O liability statistics
Here are some related statistics courtesy of Chubb, demonstrating the importance of executive liability insurance.
- More than 1 in 4 companies, or 26%, experienced D&O related losses within the past 3 years.
Of the private companies surveyed, the following percentages reported lawsuits of fines from various plaintiffs or entities:
- 54% reported suits brought by customers
- 37% were sued by vendors or suppliers
- 27% faced lawsuits of fines by government agencies or regulators
- 27% were sued by competitors
- 23% faced lawsuits brought by a partner or other shareholder.
Of all surveyed private companies, 96% said that the legal action caused them financial loss and 42% reported a loss of productivity. Additionally, 36% believed the D&O loss had a negative impact on company morale and 31% said it influenced brand reputation negatively.
The top reasons given for not buying management liability insurance by companies that did not purchase coverage is that:
- Coverage is seen as unnecessary for privately held companies (33%)
- The companies have had no related experience in the past (33%)
- 30% of companies without D&O coverage believed that coverage is not needed for family-run businesses.
Among companies that did not purchase D&O coverage and which had uncovered losses, the average financial loss was a reported $394,000.