Enron may be the worst bankruptcy in U.S. history, but corporations fail every day due to a weak economy and poor market conditions. Poor business decisions can send a company's stock price plummeting or an operation into bankruptcy.
In these cases, directors and officers (D&O) insurance may be an effective tool to help minimize the liability executives face in lawsuits brought by former employees, creditors and shareholders.
According to a recent survey by Tillinghast/Towers Perrin, the average cost of defending a D&O suit is more than $1 million, and the average settlement is generally another $1 million. Additionally, in its 1999 survey, Tillinghast/Towers Perrin noted the average D&O employee claim was $306,000.
CEOs, CFOs, vice presidents and shareholder-elected directors can be held personally liable for mismanagement. However, D&O insurance can help companies and their executives cover financial liability claims.
In its early history, D&O insurance was marketed as “personal financial protection” that provided liability coverage from corporate activities or decisions. Traditional D&O insurance is targeted to financial- and securities-related claims that arise in large or publicly traded companies. But there is a trend today to extend D&O insurance coverage to the entire company, as well as the individuals managing the operations.
For example, a new breed of D&O insurance has been combined with employment practices liability insurance (EPLI) coverage for small- or mid-size firms. A combined policy for smaller private firms might include securities liability coverage for initial public offerings (IPO) and private placements. D&O insurance also can include EPLI coverage for wrongful termination, harassment, retaliation, discrimination and wrongful discipline claims.
Employment practices claims currently are the most common lawsuits brought against company management, according to Tillinghast/Towers Perrin's survey.
In its expanded form, executives may want to weigh the costs and benefits of today's D&O insurance.
According to a 1998 Louis Harris and Associates survey, 78 percent of board directors believed that inadequate D&O insurance drives away other potential board members — something companies may not be able to afford.
For more information about insurance, visit www.wasteage.com.