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What You Need to Know Before Serving on a Board

Woman joins board of directors after making sure they have D&O insurance

The Importance of Directors and Officers Insurance

Serving on a board of directors can be an exciting opportunity to have a positive and lasting impact on a company or nonprofit organization. However, it can also put board members at risk, should they be sued as an organizational leader for failure to fulfill specific duties or act in a company’s best interest. Before accepting a board position, it’s important to ensure the organization carries directors and officers (D&O) insurance to protect the organization itself as well as its leadership’s personal assets against the threat of a lawsuit.

What is D&O liability insurance?

D&O insurance provides coverage to protect an organization’s leaders from personal losses if they’re sued in performing their duties for the business or nonprofit. It can also help pay for the legal fees and other costs the organization may incur as a result of a lawsuit.

D&O insurance typically protects the personal assets of corporate directors, officers, board members and their spouses in the event they’re sued for alleged wrongful acts performed while serving as a leader of the organization.

Why is D&O liability insurance important?

Board members are often responsible for making critical decisions that impact how the business or nonprofit organization operates. This can expose them to significant risk should something go wrong. Having adequate D&O coverage is important for several reasons:

  • Personal asset risk – If directors are accused of breaching one of their duties, they might be personally liable to defend the claim. Without adequate D&O insurance, their personal assets could be threatened.
  • Attracting talent – Individuals may be reluctant to take on a role as a director without the protection of a D&O insurance policy. Without D&O coverage, organizations can struggle to find the right people to serve in key corporate positions.
  • Security in bankruptcy – Businesses facing financial difficulty sometimes go bankrupt. In bankruptcy, creditors can pursue legal action against directors and officers if they feel they haven’t acted in the organization’s best interests.
  • Protection from regulators – Each day, regulatory bodies carry out investigations for potential corporate wrongdoings. As a result, regulatory bodies often impose costly fines against a business.
  • Risk for small- and medium-sized enterprises (SMEs) – SMEs aren’t exempt from D&O claims. In fact, they face many of the same risks and regulations as their larger peers — but they often don’t benefit from in-house HR or legal teams.
  • Competitor lawsuits – If an organization’s competitors believe they’ve been unfairly disadvantaged by dishonest or illegal actions, they may seek recourse through legal action. Competitors may sue directors and officers for a wide range of perceived wrongdoings.
  • Employee practices claims – In an increasingly litigious society, employment practices claims, such as sexual harassment or wrongful dismissal, can force directors to defend themselves against legal action. These claims can result in costly settlements for plaintiffs and put directors at risk.
  • Protection from shareholder actions – Due to their financial investment, shareholders have an incentive to monitor an organization’s ongoing performance. Disgruntled investors may file suit against directors and officers if they’re unpleased with an organization’s direction.

Serving on a board can be a very rewarding and positive experience so long as you have the appropriate coverage in place. If you’re interested in learning more about D&O insurance for board members, we can help. At Creative Planning, our wealth managers are supported by experienced insurance professionals who work as part of your team to implement custom solutions based on your needs. For help evaluating your D&O insurance options, please schedule a call.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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