Damage Control

Entrepreneur, April, 2000 by Jacquelyn Lynn

If you've got shareholders, you better get D&O liability insurance.

Doing business is downright risky, as seasoned entrepreneurs well know. And sometimes, when business leaders take risks, they end up making mistakes that cost their company--as well as their stockholders and investors--substantial amounts of money. That's where directors and officers (D&O) liability insurance comes in: In the event those stockholders and investors decide to sue, the business owners may find themselves liable. David Ezra, an attorney with Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone in Irvine, California, answers why you need D&O coverage, and more:

* What is D&O liability insurance? "It provides coverage for economic harms that result from wrongful acts or mismanagement by corporate directors and officers," Ezra explains. Examples includes wrongful acts that can be considered negligence and breaches of fiduciary duty where the director doesn't act in the best interests of the shareholders. The particular policy, as well as the laws of the state where it's issued, determine whether willful wrongdoing and criminal conduct may be covered.

* Isn't any of this covered by general liability policies? Probably not. "General liability policies normally apply to bodily injury and property-damage-type claims, and certain other tort claims," Ezra says. "They don't cover pure economic losses, such as the losses that directors and officers can be sued for when accused of mismanagement."

* How much D&O coverage does a company need? "It depends on a variety of factors: the number of stockholders, the complexity of the company's transactions, the risks involved," Ezra says. "It may not be the size of the business, but rather the diversity of its ownership and [the number of] people counting on the officers and directors to manage their assets. The more [investors you have], the more likely someone will complain. Take a look at the magnitude of the claims you're likely to face and plan accordingly."

* Why cover directors and officers and not other employees? Because they're the ones responsible and they're the ones making decisions. According to Ezra, "Ultimately, the people at the top are going to be held accountable."

* What activates D&O coverage, and what will it reimburse? Typically, a lawsuit or firm demand for money will trigger the policy, says Ezra. Most D&O policies reimburse legal fees and expenses, and pay for covered settlements and judgements up to the limit of the policy.