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Do you need D&O Insurance

April 22, 2023
Do you need D&O Insurance
          How important/unimportant is it for owners of small C corporations to get Officers and Directors insurance. Is the corporate shield sufficient in itself or not?
          I confess that I am not a fan of Office and Director Insurance.  For one, it won’t protect you from illegal acts or even excessive compensation and perks claims.  It will protect you if other shareholders [or members of the LLC] accuse you of mismanagement, which by definition is something different than criminal activity.
          So I start my response with what Artificial Intelligence [AI] has to say about it:
          “Owners of small C corporations should consider obtaining Officer and Directors (O&D) insurance as an essential component of their risk management strategy. While the corporate shield protects the business from personal liability, it does not necessarily shield the company's officers and directors from legal action. O&D insurance provides coverage for defense costs and settlements arising from lawsuits brought against the company's directors and officers.
          Without O&D insurance, officers and directors of a small C corporation may face personal liability for their actions or decisions made on behalf of the company. For example, if a director or officer is accused of breaching their fiduciary duty, they may be held personally liable for damages resulting from the breach. This liability can include legal fees, damages, and settlements, which can be financially devastating for an individual.
          Additionally, O&D insurance can help attract and retain high-quality directors and officers. Directors and officers may be hesitant to serve on a board that lacks adequate insurance coverage, as they may fear personal liability for their actions. Having O&D insurance in place can provide peace of mind and may make it easier to recruit top talent to serve on the board.
          In summary, while the corporate shield provides protection for the business entity, owners of small C corporations should consider obtaining O&D insurance as an essential component of their risk management strategy to protect their directors and officers from personal liability.”
          D&O coverage is common for public companies or even large “close” corporations that have independent Directors.  The coverage comes into play when a Director, or Officer, is accused of exercising poor judgment that causes the business financial damage.  The real question you need to start with is, who is likely to sue you?
          If you’re a single owner corporation there are no other shareholders, so the only potential claim is from creditors. While there are likely cases where creditors have sued D&Os for mismanagement I am not aware of any.  Significantly, if you’re a two or more man corporation and all owners are directors or officers the D&O policy probably won’t cover anyone if one sues the other because all D&O are insured.
          The D&O policy will not cover bodily injury or property damage; that’s covered by general liability insurance.
          The D&O policy will not cover a loss by a Subscriber for alarm failure; that’s covered by the E&) policy.
          The D&O policy typically excludes coverage for breach of contract. The policies generally limit coverage to liability that arises from errors committed in the officers' or directors' official capacity.  But Directors and officers who either intentionally or negligently act outside their authority are personally liable for any resultant damages caused to the corporation or its shareholders. A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation. Directors and Officers may be personally liable for debts incurred by the company when it was insolvent and when the company is not withholding employees' pay for taxes.
          What Does D&O Insurance Cover? Some of the most common lawsuits that D&O insurance can protect against are related to misuses of company funds, misrepresentations of company assets, breach of fiduciary duty, failure to comply with workplace laws, and a lack of corporate governance.  A claim for sexual harassment may be covered by the D&O policy but you need to be very careful to read the policy.  I suggest getting a specific endorsement covering sexual harassment and hostile workplace coverage. Other claims likely covered by the D&O policy include malfeasance by an officer in his or her fiduciary duty to the organization, third-party discrimination, and, where applicable, employment issues.
          Do you need the D&O policy; should you carry that coverage?  Well, unlike some insurance it’s not required by law.  Unlike some insurance, like E&O, it’s not essential.  But like all insurance, if you can afford it you’ll be glad you have it when  covered claim comes in.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301