When hiring directors and officers for your board, you like to believe that your judge of character is enough to prevent trouble. You vet your employees carefully and hire them based on merit and experience. But, unfortunately, not everything can be anticipated. Lawsuits concerning officers and directors are more common than you may think. Likewise, if you’re on a board as a director or officer, it’s important to be aware of the most common D&O claims.
1. Employment mistreatment
Employees are apt to sue their directors and officers if they feel that their rights have been violated. Lawsuits in these cases often concern discrimination, sexual harassment, breach of contract and wrongful dismissal.
2. The board’s failure to adhere to by-laws
Your company’s board has a lot of responsibilities to follow certain laws and codes. When these are violated, it leaves the board open for lawsuits. This can include miscounting votes, improperly removing board members and more.
Many boards are accused of defamation (libel or slander) by members who believe they have been targeted. An example of this would be one board member accusing another of stealing during a meeting.
Directors are accused of mismanagement not only by board members, but by creditors and investors, as well. Investors and shareholders have a lot to lose if a board makes a mistake, and lawsuits between the two are common. This may also fall under the umbrella of a breach of fiduciary duty.
Theft of funds or intellectual property are both common claims on a board of directors. It is especially common when a director leaves a board for another. If their ideas are similar or identical to those which the previous board used, that board may sue the director for theft of intellectual property.
What is D&O Insurance?
D&O insurance protects against lawsuits such as those listed above. It provides compensation for legal fees in case a director or officer is sued so that the board’s funds aren’t drained by expensive legal costs. This insurance also covers claims concerning pollution, misrepresentation and cyber liability. It does not cover fraud, personal profiting, bodily injury, property damage or other illegal acts.
Every company or board should carry Directors and Officers insurance in order to protect their members and their assets. If a director or officer is found guilty, however, insurance likely won’t cover the legal costs.