INSURANCE | 01.29.2024
D&O Insurance: a safety net for directors and officers
In demanding economic and regulatory landscapes, decision-making within a company can become a high-stakes activity. D&O insurance can protect directors and officers.
Due to inadequate decision-making, non-compliance with regulations, defaults, breaches of contract, labor lawsuits for violating fundamental workers’ rights, unfair competition, market practice violations, or industrial espionage, claims against corporate officials have surged in line with new rules and requirements for greater control and good governance in companies.
In these cases, officers and directors risk shouldering these claims with their own assets, primarily due to legal obligations outlined in statutes such as the Criminal Code or the Capital Companies Act, which hold them accountable for causing harm to third parties, whether directly or indirectly.
To protect themselves, they can turn to D&O insurance (Directors & Officers). They might not sound familiar, but we’ll tell you about what’s behind these initials.
In essence, these policies address the damages that they may inadvertently cause in the course of their duties to partners, shareholders, clients, suppliers, employees, official bodies, creditors, liquidators, competitors, or other companies affected by the organization’s activities.
It is important to note that these types of claims are unpredictable, arising either during their tenure or afterward. Furthermore, the responsibility may extend to spouses and immediate family members, like children.
The origins of these insurance policies trace back to Anglo-Saxon markets, specifically in the aftermath of the 1929 stock market crash that precipitated the Great Depression. In the United States, two laws were enacted to heighten corporate accountability towards shareholders and investors: the Securities Act (1933) and the Securities Exchange Act (1934).
The need arose to safeguard against the tangible risk of directors facing lawsuits for mismanagement. The insurance response emerged in the late 1930s, in London, marking the advent of D&O insurance.
Today, amidst an ever-more rigorous legal framework and a myriad of regulations influencing decision-making, D&O insurance is an indispensable safety net for them.
In the event of a claim, these insurance policies cover the defense costs of the insured party, which can be substantial: legal fees, lawyer fees and the provision of bonds.
They also take on the responsibility for court-ordered compensations resulting from wrongful acts, whether through action or omission. Furthermore, they may extend coverage to expenses associated with reputation restoration and other investigation costs in administrative proceedings, among other aspects.
D&O insurance serves to protect officers from negligent actions, but it is important to note that this does not grant immunity for wrongful conduct without consequences. If it is proven in court that the officer acted with intent or in bad faith, the insurance coverage would be rendered ineffective.
Typically, these policies are flexible, adapting to any company or business. Their purchase is voluntary and comes with numerous advantages.
- Security and confidence. D&O insurance is a solution that gives officers invaluable personal protection, enabling them to navigate daily challenges with a sense of security and confidence, backed by a policy that guarantees peace of mind in case of error.
- Attraction and retention of talent. The coverage provided serves as a strategic tool for attracting and retaining high-level executive talent. The company’s offering of this insurance fosters confidence among both candidates and the existing workforce, ensuring their well-being.
- Good business practices. For investors and shareholders, the presence of D&O insurance provides increased confidence in investing in the company, offering an additional layer of security against potential litigation.
- Preventive in nature. Given the intrinsic link between the officer’s reputation and the company’s image, particularly in higher-ranking positions, it can be a preventive tool against risks that may surface in legal proceedings. It safeguards the company's image, thereby preserving its market positioning.
Now you know more about this insurance and its benefits in business. Entities of all sizes are increasingly seeking coverage for their officers. If you find yourself in this situation, seek guidance from a specialist with extensive experience in these risks and coverage around the world. They can help you find a tailored solution.
With MAPFRE’s third-party liability insurance for officers, they can lead and manage their companies with the assurance that their decisions are properly covered.