When performing as an officer or a director of a corporation, an individual may be subject to personal liabilities, which is why there is a need for corporate directors liability insurance. These liabilities can be divided into two types; one is liabilities for which the corporation may indemnify the officer or director, and those liabilities for which indemnity is not available.
Examples of kinds of liabilities that are not subject to indemnity include the following:
- Intentional breach of the duty of care to the corporation
- Intentional breach of the duty of loyalty to the corporation
- Misappropriation of a corporate asset for personal use
- Commingling of personal and business assets
- Failure to disclose a potential or actual conflict of interest
Issues such as a rise in data breaches and increased compliance obligations for network security practices, along with increased allegations of security fraud filings, class action suits, allegations of defamation, unlawful employment practices, breach of contract, unpaid wages and unpaid tax withholding are additional exposures, and there are many other transactions that have made directors and officers increasingly more vulnerable to lawsuits.
Indemnification of officers and directors
In order to attract and retain highly qualified individuals to serve as directors and officers, corporations must ensure that directors and officers can defend themselves if sued, and, if successful, can recover the costs of that defense. The corporation will provide for expenses incurred and amounts paid in defending claims brought against them for actions taken in good faith on behalf of the corporation.
Indemnification of executives is a standard practice for public and private corporations. This indemnification means that legal representation and defense is provided directly by the corporation. This is considered “first dollar” indemnification, as opposed to monies being fronted by the officer or director and later reimbursed by the corporation. Because corporations typically provide broad indemnification rights, many former executives facing serious allegations of wrongdoing may demand that their former corporations pay their legal fees.
With the cost of defending such allegations quite high, it is only natural for these companies to invest in adequate amounts of corporate directors liability insurance.