By Craig M. Santa Maria
Did you know that corporate
executives and directors, small business owners, and even volunteer board members at non-profits can be held personally liable in legal judgments against their company or organization? It’s true, and it is a risk that is often overlooked.
Typically when a lawsuit is filed against an entity alleging mismanagement, both the entity and its executives and board directors are named as defendants, and both corporate and personal assets are at risk.
For example, a state attorney general sued a large charitable foundation and its trustees, alleging the trustees were excessively compensated and did not manage the foundation in a manner that supported its intended purpose. In the end, the suit was settled for over $5 million.
In another case, a software developer sued the directors and officers of a partner company in a failed joint venture, for misappropriation of his intellectual property. The plaintiff claimed the defendant firm took his ideas and developed its own software, allegedly retaining and using the IP to create a competing product. Upon settlement, the defendants were liable for hundreds of thousands in attorney fees and settlement costs.
While it’s reasonable to think that personal risk might deter individuals from starting a business or joining a board of directors, that risk can be mostly or totally mitigated by a quality directors and officers (D&O) liability insurance policy. In both examples above, the personal assets were protected by a D&O policy.
D&O vs. E&O
D&O liability is one of several types of coverage available as part of a Business & Management Liability Policy (others include Employment Practices Liability, Fiduciary Liability, and sometimes Crime and Privacy liabilities). D&O is sometimes called “management errors and omission (E&O) liability”; however D&O and E&O are very different. D&O liability is directly related to the performance and duties of management. E&O is concerned with performance failures and negligence related to your products or services. Both are significant risks and it is generally a good idea to carry both policies.
When Do You Need It?
Every organization’s owners, executives or directors are at risk of being held liable for the consequences of their decisions. It is particularly important to have D&O insurance when you establish a board of directors or take on investors. Both potential directors and investors will be unwilling to risk their personal assets to support your organization, no matter how strongly they believe in it.
If you are not covered by a D&O policy, you should seriously consider purchasing one for your business or demand that the organization for which you are a director or officer purchase one. A quality insurance broker can help you decide if it is necessary and design a policy that meets your needs.
Craig M. Santa Maria is President and COO of Santa Maria & Company (SMC), a risk management consultancy and commercial insurance brokerage in the San Francisco Bay area with deep expertise helping companies protect what is most important to them: their assets, their employees, and their futures. Contact SMC at 925-956-7600 or online at www.smcrisk.com.
Santa Maria & Company: Experts in Risk Management and Providing Peace of Mind