On A Board Of Directors? Don’t Get Nailed.

Mandatory Indemnities and D&O Insurance Is Important To Protect Board Members From Personal Liability.

By Benjamin P. Michaelson

The responsibilities of a corporate director include the duties of loyalty and care. Duties of loyalty arise in situations of conflicts of interest, and requires directors, as fiduciaries, to put the corporation’s interests ahead of their own; it is breached when a director diverts corporate assets, opportunities, or information for personal gain. Duties of care require the use of good business judgment and of ordinary care and prudence in the operation of the business; the director’s actions must be taken in good faith and in the best interest of the corporation, exercising the care an ordinary person would use under similar circumstances. Through legal proceedings, shareholders and customers of the corporation can pursue claims against the directors for, and directors can be personally liable for, money damages on allegations such as corporate waste, breaches of fiduciary duty, and negligence.

Directors and officers insurance (“D&O”) is specifically created to protect a corporation’s directors and officers from personal liability, as well as the corporation, against such claims. Without D&O, the directors are left to hope that the corporation pays the costs and expenses related to the claim, assuming the company is otherwise obligated or willing to indemnify them, and has the money to do so. As with other types of insurance, the coverage provided by a corporation’s D&O policy should be routinely reviewed to make certain that they will meet the needs of the company, its officers and directors by providing both a defense and indemnity for such claims. Typically these policies cover the insured for “any actual or alleged act or omission, error, misstatement, misleading statement, neglect, or breach of duty” during the discharge of their obligations.

The practical take away is that, before agreeing to be a director for any company, and certainly any company that you do not control as a shareholder, it is important to make sure that the company is obligated to indemnify you for all costs of defense and any damages resulting from your directorship, and that a properly designed D&O policy is in place.