Some business executives believe that their general liability or umbrella business insurance policies will cover claims involving directors and officers. Not true.

They also believe that D&O policies are only for some particular companies. Not true, again. A business of any size will usually have officers and possibly directors who can be targeted by litigants over their management of company affairs.

D&O liability insurance protects company directors and officers in the event they are personally sued — often in addition to the company being sued — by investors, employees, vendors, competitors, and customers, among other parties. The insurance protects directors and officers by covering legal fees, settlements, and other costs; in addition, the coverage sometimes can extend to protect the company if it is named in a suit, as well.

In many cases, when you appoint directors or hire new officers they will demand D&O coverage as a condition of serving or employment because they don’t want to put their personal assets at stake. Sometimes outside investors, such as venture capitalists or other financiers, will require D&O policies before providing funding to your business — they often see the coverage as a way to protect their investment.

Directors and officers are sued for a variety of reasons connected with their company positions, including misuse of company funds, misrepresentation of company assets, fraud, failure to comply with workplace laws, and lack of corporate governance among other issues.

Bankruptcy is one of the leading causes of loss for a business — and one of the leading causes of D&O lawsuits. A bankruptcy can spark litigation against directors and officers from creditors, lenders, customers, as well as investors. Even if a company doesn’t go bankrupt and just needs to downsize, employee layoffs may still prompt claims personally targeting directors and officers, in addition to the business. When a company needs to do layoffs, some employees might sue because they feel unfairly persecuted. They may claim they were let go because of some form of discrimination.

Unfortunately, some business executives find out too late why they need D&O insurance. Once they have had a claim, they understand why they need the insurance. It’s really important to have that executive understand before they’re sued where they’re vulnerable and who might sue them.

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