Directors & Officers Liability is the liability (or exposure to litigation) of corporate board members and officers arising out of their actions pertaining to their management duties of the corporation. Directors & Officers Liability Insurance insures the personal assets of corporate board members and officers [as well as the company’s corporate assets] from lawsuits arising out of their capacity as directors or officers of the cooperation.

What are the responsibilities of Corporate Boards?

Directors of corporate boards have many duties and responsibilities. The board of directors of a corporation generally performs the following duties:

Review & authorize major corporate actions.
Advise & counsel management on corporate decisions.
Review & oversee proper audit procedures.
Review the Cooperation’s investments.
Stay informed about the Corporation’s financial status and legal developments.
Assist management in decision-making.
Verify the Corporation is in compliance with all applicable statutes, regulations & laws.
Monitor management’s performance.

Directors & Officers of corporations are responsible for the affairs of their companies. They must use good faith and prudent judgment in their service to the corporation. Directors & Officers have certain duties and responsibilities when acting in the service of the corporation. These duties are, as follows:

General Duties - Directors & Officers must act in good faith and prudent judgment in their service to the cooperation.

Common Law Duties - The following are the common law duties-

Duty of Loyalty – Directors & Officers must avoid conflicts of interest, self-dealing, and misuse of corporate assets.

Duty of Obedience –Directors & Officers must act within the boundaries established by statute, corporate charter or by-laws, and written policies and procedures.

Duty of Diligence and Care – Directors & Officers must conduct themselves with the care that an ordinary person would exercise under similar circumstances and in similar capacities.

Statutory Duties - There are several laws and statutes that regulate the actions and decisions of Directors & Officers.

Securities Laws
Anti-Trust Laws
Employment Laws
ERISA Violations
Racketeering Laws
Tax Laws
Environmental Laws
Intellectual Property & Patent Laws
State Corporation Laws

Business Judgment Rule – Directors & Officers have historically been protected from personal liability against them by a legal principal known as the Business Judgment Rule. This legal principal shields corporate directors & officers by applying the rule for mistakes in judgment (i.e. second-guessing). As long as the director or officers has acted according to the duties of loyalty, obedience and diligence, then the director or officer may be protected by the Business Judgment Rule.

Directors & Officers Liability Claims
Directors & Officers of both Public and Private Companies face legal liabilities in their service to the corporation. The claims experience between the two varies. Public Companies experience more frequency and severity of claims related to shareholder issues, while both Public and Private Companies face similar experience for Employment Related Claims. Below is a partial list of typical claimants:

• Shareholders
  
• Employees
  
• Creditors
  
• Customers/Clients
  
• Competitors
  
• Government Regulatory Agencies

There are three categories of protection against personal liability of Directors & Officers of corporations:

Indemnification
The corporation may indemnify their directors & officers for litigation. This is usually accomplished by incorporating an indemnification clause in the corporate by-laws or by a separate written indemnification agreement.
Indemnification is also often available and governed through state law.
Some conduct by the directors & officers is not indefinable, such as dishonest/illegal acts or intentional misconduct.
Indemnification may not be available to directors & officers in cases of financial insolvency or bankruptcy.

Common Law and Statute
Business Judgment Rule – Courts may apply the Business Judgment Rule to protect directors & officers from personal liability.
Liability-Limiting Statutes – some state and federal laws provide limitation of liability in certain cases.

Insurance Coverage
Insurance provides protection for individual directors & officers when the corporation is not permitted to indemnify or financially unable to indemnify the directors & officers.
When the corporation does indemnify, D&O insurance will Pay On Behalf Of or indemnify the corporation for payments made to the directors & officers.
In some cases, coverage may be provided for the corporate entity, in cases where the corporation is being held liable. D&O insurance provides Balance Sheet Protection for the corporation. Insurance allows the corporation to transfer risk from its own balance sheet to that of the insurer.

D&O insurance helps the corporation attract and retain quality board members.