5 Management Liability Risks That Can Affect Directors & Officers
Company CEOs and officers receive protection from management liability exposure in many situations, but not all. As an executive, you should understand the liability risks that you and your company officers face. Recognizing those risks makes mitigating and protecting your financial interests easier. There are a few core areas where executives and officers often face liability exposures.
Management Liability Includes Personal Criminal Behaviors
The personal actions of a CEO or other executive officer may create a liability risk. For example, bribery, extortion, and embezzlement are criminal actions that create a liability risk when committed by a CEO or other officer.
Liability Results From Gross Negligence and Deliberate Non-Compliance
Every company must comply with federal reporting and communications standards. Failure to comply with those reporting requirements or filing false reports will result in management liability risks for the company.
Liability Can Stem From Direct Personally-Targeted Lawsuits
Company officers, CEOs, and executives are often targets of personal lawsuits. When a company officer faces a lawsuit for their personal actions, their affiliation with the company creates a liability exposure for the business. Sometimes, D & O liability insurance covers any ruling against the CEO or other executives, even when the ruling stems from a third-party lawsuit.
Liability Exposure Extends To Corporate Veil Disruption
The corporate veil is a presumption of separation between the actions of an individual executive or officer and the company itself. Sometimes, events create a demand to pierce that veil. When that happens, there are typically D & O management liability risks to address.
For example, officers mixing business and personal expenses create an unclear situation with questions of impropriety. An officer exceeding their executive authority also creates liability risks. When a company files or prepares for a bankruptcy case, any financial situation with liabilities exceeding assets may also lead to a liability risk.
Liability Risks Come From Derivative Shareholder Cases
When evidence indicates that a CEO or company officer commits fraud or financial mismanagement that negatively affects shareholder returns, those shareholders may file a claim against the responsible executives and the company. It can lead to significant settlements to make shareholders whole and sometimes leads to criminal investigations for fraud. A D&O policy can help protect companies from the financial effects of those situations. Any settlement ordered in these cases typically receives D & O Insurance policy.
D & O Management Liability Insurance Has Limitations
Every D & O liability policy has limitations on coverage. A good faith clause requires that the individual in question in the claim act in good faith and not deliberately break the law. In addition, many policies exclude breach of contract claims and other losses that are eligible for coverage under alternative policies. Property liability claims, for example, would fall under the company’s commercial property coverage.
Read the policy declarations carefully to understand the coverage your management liability policy extends and what losses the policy restricts. You should also clarify any exemptions to those exclusions, including specific actions. The more information you have, the simpler it is to protect your officers and executives.
About Byrnes Agency
At Byrnes Agency, we offer insurance solutions that can be tailored to meet your specific needs. Whether you’re looking for personal policies or commercial coverage, we have the right coverage for you. To learn more about our products, contact us today at one of our two locations.
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