In order to understand the benefits of D&O insurance, we must first examine the responsibilities of directors and officers.
When it comes to basic corporate functions, directors and officers of both private and public companies have a number of specific duties. Directors and officers are expected to fulfil these duties and they have an obligation to act in a company’s best interests. The following are some basic executive duties directors and officers should be aware of.
Duty of Diligence
Sometimes referred to as duty of care, this responsibility requires directors and officers to act in good faith. This means that directors and officers must consider all available information before making a decision and act in the same way a reasonable person faced with the same decision and responsibilities would act.
This duty requires not only reasonable behaviour with respect to matters submitted for approval, but also reasonable inquiry and monitoring of the organization’s affairs. The duty of diligence may be higher for directors and officers of charitable or other types of not-for-profit entities in certain jurisdictions.
Duty of Loyalty
Directors’ and officers’ duty of loyalty is meant to prevent them from engaging in conduct that would otherwise hurt or take advantage of the company they serve. Through this duty, directors and officers have an obligation to avoid any conflicts of interest. Some examples of leaders breaking their duty of loyalty include the following:
- Gaining secret profits or unfair gains through personal transactions with or on behalf of the organization
- Competing with the organization or stealing corporate opportunities
- Profiting from the use of the organization’s material, non-public information
Duty of Obedience
Per their duty of obedience, directors and officers are obligated to follow the statutes and terms of their organization’s agreements. Directors and officers may be held liable if they authorize an act that is beyond the powers established by their company’s charter.
It should be noted that non-profit organizations are frequently regulated by a multitude of statutes, rules and regulations—many of which are unfamiliar to outside directors and officers. As such, it’s important for directors and officers of these organizations to be extremely careful in order to avoid a claim. Failure to comply with technical requirements may subject the directors and officers to personal liability for any organizational damage.
To find out what are some of the main sources of D&O liability, check out part 2 of our series.