Five Things to Know About D&O

Serving as a director or officer of a company carries certain inherent risks—including the prospect of lawsuits challenging managerial actions. For that reason, companies often arrange to carry D&O insurance to attract and protect individuals who serve in such roles. Unfortunately, the first time that many officers and directors drill down into the details of coverage available to them as part of a policy is after a claim for damages is asserted against them.
Counsel for directors and officers should not allow clients to end up in that position. Rather, counsel should emphasize to clients that the time for understanding a policy’s protections is at the outset of a company’s purchase or renewal of insurance. Waiting until a claim is made is obviously not the time to attempt to redraft policy language or obtain additional protection. Counsel for individuals thinking of serving in director or officer roles can provide essential value by asking critical questions, obtaining certain answers, and securing appropriate policy provisions.
Set forth below are five essential aspects of D&O insurance that counsel should emphasize to clients in the current business environment. A recent Sixth Circuit opinion discussed below, Indian Harbor Ins. Co. v. Zucker, highlights the significance of these points. Counsel should emphasize these points to individuals serving or contemplating serving in the role of officer or director.
1. D&O Actions Commonly Arise in Distressed Situations
When a company encounters a period of distress—whether by market conditions, fraud, an overleveraged balance sheet, or other factor—it is common for the actions of the company’s directors and officers to be examined for possible causes of action. A typical scenario today is a quick sale of the company’s assets in a distressed situation. In the usual case where sale proceeds are not sufficient to satisfy all constituents, a fiduciary (such a