Why Is Directors And Officers Insurance Necessary?

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Directors and officers insurance is necessary to protect these valuable people from claims made by stockholders, employees and clients

. It is not unusual for stockholders to sue the company over disappointing results. These lawsuits are increasing in both number and financial ramifications. Recent surveys indicate up to 31% of companies can expect lawsuits. Companies with assets less than 100 million have a 12% chance of being sued; companies with assets exceeding 10 billion have a 63% chance of a lawsuit. It makes financial sense to carry this insurance. Directors and officers have duties to perform; these are spelled out in the companies bylaws and usually include governing, selecting and reviewing the chief executive officer, making sure the company has adequate finances to operate, approving budgets and being responsible for the organization's performance to stockholders. This insurance is like an e & o insurance policy for management.

An important part of this coverage of director and officer insurance is the legal defense costs. In 1999 successful stockholders who charged their companies, directors and officers with securities fraud received average settlements of greater than $8 million and the average cost to defend these lawsuits exceeded $1 million. People are much more willing to serve on a board as a director or as an officer of the company if they have some protection for themselves and their personal assets. Almost all of the Fortune 500 companies provide directors and officer insurance to protect themselves and their people.

Additional coverage often included in directors and officers insurance is employment practices liability. Fifty percent of claims against corporations have to do with employment. This could be charges of sexual harassment and complaints about current or past hiring, promotions and firing practices. One of the benefits of having director and officers insurance is the risk management provided by these experienced insurance providers. Developing and using a system for dealing with employees will reduce claims. These suits are expensive to defend against or to settle as the claimant may bring in various employment or discrimination laws favored by states or the federal government.

These insurance policies protect board of directors and officers from unjustified claims by providing aggressive, informed attorneys to defend the company and individuals. Having this qualified, competent legal team allows the company to continue to operate and focus on what is important instead of wasting valuable time finding ways to defend or eliminate pending lawsuits.

Quality, experienced people serving as directors and officers on boards of corporations and companies help these entities grow and expand. These people bring information and guidance to the organizations they serve. This is expertise the organizations could not afford to buy if they had to hire these people to work for them. Protecting the most valuable resources of any organization, the people who manage it, is done through this specialized insurance policy.

by: Bob Roberts

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