Corporate directors make many impactful decisions, which means directors face a high risk of being held liable for poor decisions. Despite this, many directors underestimate the importance of taking out a Directors Corporate Liability policy. Before ruling out purchasing a policy, directors should remember the following potential sources of liability, which can usually only be addressed through directors & officers insurance.
Major Areas of Risk
Directors face diverse risks due to their wide range of responsibilities. Some especially problematic areas of responsibility include:
- Finances. Directors must use funds appropriately and act in the best interests of the corporation.
- Security. Directors must take reasonable steps to prevent data breaches and other security issues.
- Legal compliance. Directors must ensure company actions comply with a growing body of legal regulations.
Breaches in these areas can lead to anything from fines and legal sanctions to shareholder lawsuits and loss of client confidence. Unfortunately, directors often must make highly subjective decisions that may later be judged harshly by others.
Mitigating the Risk
A strong Directors Corporate Liability policy can protect directors and the organization as a whole against financial losses resulting from failures in these areas. Most policies will cover any actions by directors that did not involve intentional deceit or wrongdoing.
Besides purchasing policies, it is essential that organizations choose policies with appropriate coverage. There are three “sides” to directors & officers insurance, each addressing a different area of risk. Directors should carefully evaluate which sides of coverage they need, based on personal assets and company cash flow, to make sure they choose a policy that offers adequate protection.