5 common sources of D&O liability

D&O Insurance: 5 Common Sources of Liability for Businesses

In today’s business climate of corporate transparency and accountability, an organization’s officers and directors face a myriad of employment-related exposures. Regardless of your company’s size or mission, the legal costs associated with a lawsuit can be crippling for both the organization and your directors and officers.

Employees

Most directors and officers are surprised to learn that their employees are one of the most common sources of a D&O claim against their organization. In fact, for private businesses and non-profit organizations, employees are the most common source of D&O claims.

If employees are mistreated during any phase of their employment, they may bring their concerns to the organization’s management team. If employees feel that their concerns have not been addressed sufficiently, they may see legal action as a means of rectifying their grievances.

Common employment practices claims against directors and officers include the following allegations:

  • Wrongful dismissal
  • Discrimination, including workplace and sexual harassment
  • Breach of employment contract
  • Failure to address health and safety concerns

Government and Regulatory Authorities

Governmental and regulatory authorities exist to monitor the environment in which organizations operate. These bodies help ensure that directors and officers and the organizations they control conduct their activities fairly and lawfully.

Government and regulatory bodies monitor compliance with a broad range of laws, including the following:

  • Corporations law: Governs the ownership and management of organizations
  • Securities law: Governs the administration of publicly listed companies
  • Consumer protection law: Governs the way in which organizations distribute products and services to consumers
  • Occupational health and safety law: Ensures that organizations maintain a safe workplace
  • Taxation law: Governs the taxation of organizations and individuals
  • Environmental law: Ensures that industry participants adhere to environmental restrictions

For directors and officers, the enforcement power held by these bodies presents a significant exposure to D&O claims. If regulators discover wrongful conduct has occurred, they may pursue legal action against the organization and the executives involved.

Competitors

As organizations attempt to grow their market share, management teams must ensure that growth is achieved through fair business practices. If an organization’s competitors believe that they have been unfairly disadvantaged by dishonest or illegal behaviour, they may seek recourse through legal action.

Directors and officers can be brought into legal action for a range of perceived wrongdoings, including the following allegations:

  • Breaches of intellectual property
  • Misappropriation of trade secrets
  • Collusion
  • Anti-competitive behaviour

Moreover, directors and officers may also be held liable for actions perceived as misleading or defamatory, with claimants seeking damages for their perceived losses.

Creditors

An organization’s management team is responsible for monitoring its financial position and its ability to meet debt obligations as they become due. If an organization becomes insolvent, creditors will often scrutinize the decisions of directors and officers to see if they can be held personally responsible.

If debts are left unpaid when an organization goes into liquidation, creditors can pursue executives personally to recover outstanding funds. Common allegations by creditors against directors and officers include the following allegations:

  • Breach of fiduciary duty
  • Breach of duty of due care
  • Negligence
  • Deliberate misconduct

Shareholders

Due to their financial investment, shareholders are incentivized to monitor an organization’s ongoing performance and ensure that directors and officers act with the organization’s best interests in mind. With potentially large sums of money at stake, shareholders may take measures to protect their investment if they are not pleased with an organization’s direction. If it appears that management has breached their duties to the detriment of an organization, shareholders may bring a claim against those directors and officers.

Whether you’re a non-profit, privately held, or a public company, your business can likely benefit from a D&O policy. Since there is no such thing as a “standard” policy, a professional broker is invaluable when you go to purchase D&O coverage.

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