In today’s volatile environment where everything is highly competitive and unpredictable it has become more than ever necessary to control expenses from all angles possible. Hence companies in doubt about getting directors’ and officers’ liability insurance (commonly known as D&O insurance); could weigh the cost of getting one against the risk and eventual costs involved of not having gotten it.
What is Directors’ and officers’ liability insurance?
D&O insurance generally covers management of a company from claims made against them by third parties; for the losses the third party claims they have incurred due to management’s acts, errors, omissions, misstatements and misleading statements. But it is also important to remember; similar to any insurance policy; the coverage offered by this policy is subject to the policy’s limit of liability, exclusions and other conditions.
To make an informed decision on whether it is important to take this policy or not; managers need to understand the risks and if they and their companies can manage to handle these risks during distressed times; without taking D&O insurance.
Here are the risks involved and how D&O insurance can help you through distressed times.
Long list of potential claimants
Whether it is a public company or a private company; list of third parties who can file a claim against management is very long. It could be employees or labor unions, banks, creditors, other holders of debt, government agencies, customer and vendors who relied on the management’s representation. Basically anyone who relies on anything the management had said or done and claimed that they lost money doing so can become a potential claimant. While in the case of a public company the list can get bigger than a private company; it is still pretty long one for both. Hence while the risk can be anyone; having an insurance to help you during such a time can definitely reduce a lot of stress off the company and managements shoulders.
Cost of defending claims
If there is a claim against an individual manager then they generally ask the company to cover them for defenses and damages (in case they face any). Moreover the cost of defending such claims can be overwhelming especially for a private firm. In this case D&O insurance can be a blessing; as in case the company due to financial crisis is unable to cover the manager; then he or she is personally exposed; which also hugely affects the reputation of the firm. While we wonder how a remote risk like this can turn into something so extreme that it can threaten the net worth of the manager, business or maybe both; then this is because there are many companies these days which have started out on a small scale; and have gotten primary success based on innovative new business ideas. But with innovation there is also risk and if even one of the innovations goes wrong with just one customer; it can turn quite bad for the company.
Relationships with investors and creditors-
Relationships keep changing and to keep them right it is very important to create the perfect balance. However no matter how hard we try especially in a business environment where there are so many people involved, maintaining the perfect balance can become quite difficult at times. While your company may have a great understanding with the investors and creditors; there is always the risk of a claim against management if something goes wrong. This can be a very tough claim to handle if you are not well prepared with financial backing.
Representations being made by lower-level personnel
Sometimes due to the nature of your business there can be a high level of risk involved due to representations made by lower-level personnel; and even though you will always take the necessary precautions it is impossible to control each aspect of the company; especially as it gets larger. Also the level of control and oversight that senior management has over the statements and representations made by the subordinates may vary. Hence with this sort of constant risk that cannot be controlled it is always better to be prepared financially.
Line of business that makes it susceptible to litigation
There are certain businesses that are more prone to being exposed to risk; due to the nature of their business and hence it is imperative for such businesses and their directors to have some sort of cover. So while running any kind of business the management is exposed to some type of risk, but certain companies may be more susceptible to such risks affecting their management; such as medical equipments, medical software, finances, a food industry; etc. are and can very easily attract some sort of litigation; due to the nature of their work. Hence for such companies it is impossible to think of operating without an insurance policy.
Finally having a D&O insurance has become the need of the hour in today’s distressed times; especially with companies needing to compete with each other more than ever before nowadays.
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