If your company has investors, a board of directors or other stakeholders, it may be exposed to a lawsuit if an officer or director makes a mistake.
That’s why many companies invest in directors and officers (D&O) insurance. Just as medical malpractice insurance covers doctors, directors and officers insurance protects your company should a board member or officer make a costly mistake.
“More businesses have exposure to possible lawsuits than actually have this insurance,” says Bob Fenner, CEO of Thomas Fenner Woods Agency Inc.
Fenner says even your employees can sue your company if they participate in a profit-sharing plan and feel they have lost money due to director or officer omission or error.
“Anyone that feels he or she has suffered a financial loss as a result of an error can file suit,” says Fenner.
And due to events at Enron and WorldCom, there is a growing mistrust of larger companies.
“People feel that these companies misled investors,” says Fenner.
So the need for D&O insurance has never been greater, but Fenner says thanks then recent accounting scandals, policies will not be as easy to come by and will be more costly.
“No doubt the policies will be more expensive and companies will be under more scrutiny by underwriters,” said Fenner.
Insurance companies will be asking for more extensive financial statements that cover a longer period of time than they did previously.
“A company will need CPA-audited financial statements going back at least five years,” says Fenner. “And there will be more scrutiny of the experience of the directors.”
Underwriters will look for a conflict of interest and accounting signs of insider trading, as well as at the directors’ experience, says Fenner. In the application process, they’ll also look for downsizing plans and seek explanations.
Smaller firms that previously purchased D&O insurance because it also protected them against potential employee discrimination suits might now be better served by purchasing an Employment Practices Liability Insurance policy, says Fenner. However, if your company is publicly traded and has 10 or more shareholders, D&O insurance is highly recommended. How to reach: Thomas Fenner Woods Agency Inc., (614) 764-8999 or www.tfwinsurance.com
