03 Oct

Protecting Directors and Officers - Guide to Directors and Officers Insurance (pt.3)

By Axis Marketing on

 

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For an organization with many internal and external risks, protecting its directors and officers can feel like an uphill battle. While these risks are serious, companies can rest assured that they aren’t without recourse. There are a number of strategies organizations can implement today that will protect their leadership team well into the future.

Risk Management

When it comes to limiting an exposure, specific risk management strategies are critical. For directors and officers, the first line of defence from a claim is to have a deep understanding of their responsibilities. In general, all directors and officers should be aware of the following:

  • Their responsibility to the corporation
  • The role they fulfill on the board or in a management capacity
  • The expertise they are expected to bring to the position

With these responsibilities in mind, directors and officers must use sound judgment and act with care. This means they need to demonstrate tact and diligence when attending board meetings, reviewing board materials and questioning matters put before the board. Doing so will greatly reduce the risks of litigation.

Some carriers can provide general materials relating to risk management guidance upon request. Directors and officers are encouraged to consult their own legal counsel for specific advice as it pertains to corporate duties, responsibilities and exposures.

10 Risk Management Strategies

When it comes to risk management, few things are more important than providing proper education to directors and officers regarding their responsibilities and exposures. The following are strategies companies can use to ensure that directors and officers are aware of their expectations.

  1. Provide training on negligence and liability.
  2. Ensure directors and officers are aware of all risks and rules associated with their positions.
  3. Establish company's interests.
  4. Implement policies and procedures for directors and officers to follow, and make sure they are aware of these policies.
  5. Protect all employees from anticipated harm.
  6. Establish a formal reporting system for directors and officers to receive information.
  7. Encourage directors and officers to question anything they don't understand about the organization or its activities.
  8. Document all decisions and processes.
  9. Consult legal counsel when directors and officers make decisions.
  10. Ensure directors and officers know their rights and obligations as well as how the organization can protect them.

Indemnification

Another major form of protection for corporate officials is indemnification. This is a statutorily authorized protection that is often detailed in corporate documents, like an organization’s incorporation or bylaws.

Indemnification provides the right to the advancement of defence expenses and general protection from any legal responsibility following a claim. Indemnification is particularly important when you consider that D&O insurance has its limits. D&O insurance is subject to limits of liability, whereas indemnification is unlimited in practice. While D&O policies are likely to change when they are renewed, indemnification is much more stable, especially when corporate officials are allowed to negotiate their own contracts.

However, indemnification can be limited based on the indemnifying company’s financial resources. What’s more, indemnification is often very broad, only applying to the maximum extent permitted by law. This contrasts with D&O insurance policies, which typically contain numerous exclusions and conditions.

A company’s indemnification provisions will detail what procedures directors and officers must follow in order to receive protection. For added specificity, companies should consider creating a separate written indemnification provision, which provides clarity during times of corporate turbulence and certain protections against the wrongful withholding of indemnification.

Insurance

Dedicated D&O insurance is one of the best ways to protect against management risks. This coverage protects the personal assets of directors and officers in the event the company does not pay defence costs or fund indemnification, and it is essential to helping organizations attract qualified individuals to serve on their boards.

D&O policies are a no-brainer for companies of all sizes and industries, as they respond to financial losses that would not otherwise be covered by a general liability, securities claims or similar policy. What’s more, unlike other professional liability policies, D&O coverage protects more than just the company, extending directly to leadership itself.

D&O insurance works best when it’s used alongside a risk management program and indemnification. D&O insurance provides protection for company officials when corporate indemnification is not available, whether due to financial restrictions or legal prohibition. D&O insurance also provides a mechanism for corporations to be reimbursed when they do indemnify their executives.

D&O policies can be customized to meet the unique needs of any organization or leadership personnel. Companies and their directors and officers should evaluate their specific insurance requirements before the underwriting process begins. Doing so will ensure there are no gaps in coverage and that protection is available when it’s needed.

 

Contact us today to learn more about the appropriate level of protection for your company in order to safeguard your firm from potential D&O liability.

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