It is not easy to sue the officers and directors of a business organization. You may believe in your product, but you know enough about human nature that you do not want to be personally liable if something goes wrong. You form a corporation — or a limited liability partnership or another form of business organization — to protect yourself and your family. The company is liable for any losses. The directors, officers, shareholders or members are off the hook.
Most of the time. If the court believes the company has engaged in criminal or fraudulent activity, for example, the court may “pierce the corporate veil” and hold the directors, officers, etc. personally liable. Think “Enron.” If the company’s policies and procedures resulted in the deaths of 64 people from fungal meningitis, the people behind the curtain are back on the hook. Now, think “New England Compounding Center.”
This is where directors and officers insurance comes in. As we explained in our last post, the coverage kicks in when a claim is filed against the directors. All D&O polices are claims-made, including the one at the heart of the case we’ve been discussing.
Remember, a claims-made policy will only cover claims filed while the policy is in force. Even if the directors robbed the company blind before the policy expired, the insurer would not process a claim filed after that date.
Most of the time. Insurers do allow claimants a “discovery period” — say, 60 days — during which the company will accept a claim against the policy that has lapsed. But, again, the activity in question has to have taken place during the policy term.
It seems the claimant in this case had missed the discovery period. The incident took place during the policy term, but the filing deadline had passed. The insurer denied the claim.
As we all know, though, a claim denial does not extinguish the complaint. The directors will now have to bear the costs of defending the complaint and pay damages, if any; they’re on their own, back on the hook.
Had the controller understood the risk, understood what the insurance was for, he or she would likely have renewed the policy. It was a costly mistake.
Know your policy. Know your coverage. If you can’t figure it out, consult with a professional.
Source: Insurance News Net, “Directors of Company Find No Insurance Coverage in Place When Lawsuit Commences,” March 20, 2015Share