Importance of Directors and Officers Liability Insurance

You were the head of a small manufacturing company, and one day, you received a terrible news: the local authority where your company is located filed a case against you. This was related to the fire regulations that you were consistently arguing to be unnecessary and superfluous.

Looking at the window in your office, you were already kind of expecting that the authority would resort to legal action; however, you were still hoping that things could still be discussed especially when you had substantial proof of your claim. But apparently, there was no way that this could be resolved without the need of going to a court.

You sighed.

You went back to your desk only to realize that facing the trial would involve not only courage and evidence but also monetary resources. You asked yourself, “Does the company have allocation for this kind of events? And if there is, will it be enough to cover the expenses?”

Beads of sweat rolled down your temple and forehead. You contemplated for a while. You realized that this case will definitely hurt and affect your company’s balance sheet. But the worst part is, you might even need to shell out your personal assets in case the company has not enough resources. If you were the head, what would you do?

It would be easy to dismiss that these things would never happen in real life. But guess what. It did happen. This is an actual case, with some details changed to ensure confidentiality. And just like any lawsuit, this would mean hiring lawyers and going through legal proceedings which will cost the leaders some financial resources. The company may support, but what if the actual expenses and the damages awarded, which could go up to millions, exceeded the budget? Where would you and the company get additional resources?

Providing Support to Heads of Organizations

From employee rights to gender equality to climate change, there are lots of issues that leaders need to deal with, and these are on top of the operational and strategic problems that they are already facing. Though there are people under them who should be focusing on the different aspects of the day-to-day activities, the accountability still falls on the leaders’ shoulders which causes them to spread themselves too thin.

This is why Directors and Officers (D&O) Liability Insurance was created – to provide some financial cushion when the unexpected happens and plans do not go out well. It enables the organizations to provide financial support to their leaders during legal proceedings without harming the company’s balance sheets. In this way, both the leaders and the company can focus on running the business without having to worry about financial burden.

However, it might be argued that the complex work and heavy responsibility come with the paycheck that these leaders are receiving; however, this does not mean that they don’t need extra support from the organization that they are serving. First, not all leaders accepted the position because of the financial reward that they can get. Some leaders, especially in the non-profit sector, truly believe in the mission of the organization which is why even though the paycheck is not that high, they still assumed the position. In this case, their financial resources are vulnerable if there will be any litigation, and the organization might need to support them financially when there are lawsuits filed against them.

Second, even for those leaders with high paycheck, there is still a need for the organization to support them financially. One reason is to preserve the relationship. Imagine if a lawsuit is filed against a company director or officer and he/she was not able to get any help from the company that he/she has been serving. Wouldn’t it create an atmosphere of distrust between the company and the leader? And this is not favorable for the company since it will affect the performance of the leader and the overall profitability of the company.

Third reason is for the company to remain competitive in attracting top talents. Executive search is a highly competitive arena, and top candidates will look for the best package that companies have to offer. In an article published by Atty. Dennis Funa, the Insurance Commissioner, in Business Mirror, all listed companies in Hong Kong are required to have D&O Liability Insurance while over 80% have in Singapore and over 95% have in the US. This trend could be further adopted in the Philippines, and heads of organization might look for it in the companies which want to hire them. D&O is also important in attracting distinguished independent directors to join your organization since this offers a layer of protection for them and this shows that your company practices good governance.

Invest in Your Leaders

Leaders drive the organization forward, and this is the number one reason why organizations need to invest in their leaders. Investment may come in the form of salary and bonuses, perks and benefits, but the most important is the support when the time of need arises such as litigation and lawsuits which could easily go into millions depending on their nature. This is where D&O Liability Insurance can help.

D&O Liability Insurance covers the directors and officers for personal liability arising from their management of an organization. It aims to protect the directors’ and officers’ personal assets when they are alleged to have made poor actions or decisions. This insurance is important since directors and officers, no matter how prudent they are, may implement decisions that adversely affect shareholders, trading partners, competitors, suppliers, customers, or employees. And anyone from these groups may file a suit against the directors and officers of the organization. This D&O Liability Insurance is not only applicable to companies but also to foundations and associations.

With this, we at Trinity hope that the above information helps you understand the benefits and importance of D&O Liability Insurance. In this digital age, it is essential for organizations to continually adapt to stay relevant, and we believe that by providing you with new products such as D&O Liability Insurance, we can help your organization achieve its goals.

Sources:

https://businessmirror.com.ph/2020/08/19/directors-and-officers-liability-insurance/