Irrespective of the industry, every organization needs to follow a strategy to combat unexpected events related to business. A part of this strategy includes safeguarding the company’s board of directors against lawsuits. This can be done through D&O insurance, which covers a wide range of lawsuits that might be filed by customers, vendors, employees, or the general public against the organisation or its directors.
Running a successful company and managing a board of directors is a tough ask and if you’re in this position you would know that the directors handle several responsibilities. Their decisions can impact any stakeholder related to business operations negatively. Based on this uncertainty, they could face litigations and often have to deal with legal issues.
Although D&O liability insurance assures coverage for defense costs as per the policy terms, it is crucial for to know about the situations that require you to file a claim. This will help you be prepared to deal with the possible outcomes of a lawsuit against your company’s directors.
Let’s dig deeper to know about these four types of situations that can lead to D&O insurance claim.
- Breach of Duty Resulting in Financial Loss
If investors are backing up your business, they expect to get good returns for their investments. Ups and downs in the sales and profit graphs of your company will occur regularly. However, to manage through these situations and ensure business growth, your company’s directors need to take significant decisions.
If an investor thinks such decisions have led to a financial loss, he is likely to file a lawsuit against the director/directors for a breach of duty. Legal proceedings will then begin to establish the factual correctness of the case.
- Breach of Trust Between Directors on Board
There is a considerable difference between bringing new directors into your company’s board and hiring new employees. Directors are responsible for managing the overall business performance, dealing with mergers and planning business expansion. The higher the responsibility, the higher the risk of things getting out of hand.
As you run your organization, you deal with the directors, who are on the boardof the company. However, you never know when one director starts to distrust another. A situation like this won’t be good for your company’s reputation. In the worst-case scenario, there is a possibility that one director files a lawsuit against the other for breach of trust.
- Putting Company’s Funds to Wrong Use
Your company’s growth provides profits which can be used to fund your expansion plans. The directors on board make the key decisions in this regard.
Let’s assume the best possible outcome for your company – you’ve managed to expand its reach amongst the targeted customers, led revenue growth, made it profitable, and eventually turned it into a public listed company.
However shareholders would have a say on your decisions towards utilizing the company’s funds. They may like or dislike your approach towards your strategies for the company’s growth and in case they disagree with your views, they could end up filing a litigation against you for misuse of the company’s funds.
- Intellectual Property Theft
The startup ecosystem is thriving across the globe, generating millions and more in revenue and getting massive funding. Startup ideas can involve the execution of a traditional business model in a new way, or creation of a new and unique product or service.
If your company is a part of the startup ecosystem, safeguarding your business-related intellectual property is crucial for you. Once your innovative product or idea has come to light, you want the world to know about it. However, you need to have the best protection for your innovation through patents and copyrights.
One possible scenario is when a stakeholder in your company thinks a director is stealing the company’s intellectual properties. This assumption can also lead to a lawsuit against directors on the board.
The above examples illustrate how lawsuits can come up against your company’s directors. However a good D&O insurance policy can provide cover as per the policy’s guidelines and terms. So you are best off choosing the policy wisely. If you are not aware of the exclusions and inclusions related to D&O liability insurance, discuss things in detail with a reputable and award winning insurance broker like SecureNow before making the right decision.