Defending Claims Against Corporate Officers and Directors

When people aren’t happy, they look for someone to blame. If a company’s stock isn’t performing as expected or projections are lower than hoped for, people look for reasons to blame corporate officers and directors. Of course, blame alone doesn’t achieve much, so the next step is to look for a reason to accuse directors or officers of some type of wrongful conduct. And then they file a lawsuit.

Corporate officers and directors are always a target, and that is why so much effort is put into corporate governance and indemnification agreements. At the end of the day, however, it is often directors and officers liability insurance—D&O insurance—that provides the ultimate defense when targeted attacks threaten the assets of corporate leaders.

Response from D&O Insurers is Often Disappointing

Unfortunately, the insurance companies that provide D&O policies often try to point the finger of blame as well, producing reasons why coverage does not apply because a director or officer’s conduct was outside the scope of coverage. Or the insurance company might simply dodge the claim and defense obligations altogether without providing a reason. But insurance companies are obligated to mount a vigorous defense in most cases, and when they neglect that obligation, it is important to take the right steps to hold them accountable.

An attorney experienced in resolving insurance disputes can review your coverage and “remind” the insurer of the contractual responsibilities under the policies. If informal communications and negotiations fail to produce the appropriate results, it may be necessary to use litigation as a tool to ensure compliance from the insurance company. Defense and indemnification are what you pay for with insurance premiums, and it makes sense to ensure that you get the services you’ve invested in.

Where Claims Against Directors & Officers Originate

When defending corporate officers and directors, it is helpful to understand the origin of the threat. Some of the most common reasons directors and officers face potential liability include allegations of :

• Breach of fiduciary duty owed to shareholders and other investors
• Illegal employment practices such as systemic discrimination, workplace harassment, or wrongful termination
• Regulatory misconduct such as consumer deception, failure to protect data, or anti-competitive practices

In addition, many claims originate with external stakeholders who allege that material misrepresentations induced them to enter into contracts, that the corporation has failed to pay debts, that the corporation has wrongfully appropriated intellectual property, or other claims.

The First Line of Defense in Claims Against Directors and Officers

To a certain extent, the law respects the service of corporate directors and officers, and that is reflected in a legal premise known as the business judgment rule. This creates a presumption that these corporate leaders are acting in good faith, based on appropriate information, and in the best interests of the company. This is the starting presumption, and anyone alleging wrongdoing on the part of officers and directors must introduce evidence and arguments to overcome this presumption.

Another protection provided to directors and officers is the separation created by the formalities of corporate structure. This structure—when properly established and maintained—should protect the personal assets of corporate leaders from seizure based on corporate liability. However, if officers or directors have mingled personal and business financial interests, it can be easy for predators to “pierce the corporate veil” and attach personal assets. 

Corporate bylaws often require companies to cover legal fees and pay settlements, but when a company has invested in D&O insurance, it makes sense that the financial burden should be met by the insurance company.

Activating a D&O Policy

Every insurance policy is unique, so it is important to review and understand coverage completely. Generally, there are three prongs to coverage in D&O policies. One prong provides direct protection to directors when the company is unable to indemnify them due to bankruptcy or other crisis situations. Another prong of coverage reimburses the corporation for funds paid to indemnify officers and directors. Then the final prong of coverage protects the corporate entity itself.

The contractual terms of a D&O policy create two primary obligations: a duty to defend and a duty to pay. It is important to ensure that an insurance company fulfills the duty to defend from the moment a claim is filed against covered parties.

When an insurer is made aware of a claim, they may take immediate action to try to escape contractual obligations. They may deny the claim outright or issue a reservation of rights letter allowing them to deny the claim later. Reasons given for denial often include:

• Actions of directors or officers were fraudulent and therefore not covered
• Notice of the dispute was provided too late
• Allegations that the claim falls under the “insured vs. insured” exclusion

Sometimes the objections are valid, but many times, they are simply a tactic to try to save money by dodging obligations.

Overcoming the Obstacles

Claims against directors and officers are usually complex, and the ramifications can be tremendous for the future of a company. It is important to notify the D&O insurance provider as soon as possible, but at the same time, it is vital to avoid saying or doing something that could be taken as an admission of liability. 

If the insurer refuses to defend the action properly, denies coverage, or undervalues the claim, then it can be very helpful to consult an experienced insurance attorney who focuses on representing policyholders. It may be necessary to sue the insurer for breach of contract, but often the impasse can be resolved through negotiation without the need for a trial.

Ver Ploeg & Marino Fights for Policyholders When Insurance Companies Shirk Responsibilities

Insurance companies are trying to make money, just like everyone else. However, when they wrongfully avoid their policy obligations to keep costs down, they need to be held accountable. Many times, their actions cross the line into bad faith, but even if wrongful behavior does not meet the legal standard to qualify as bad faith, it is still helpful to use legal processes to compel results.

If you have questions about an insurer’s obligations or your rights under a D&O policy, we invite you to schedule a confidential consultation with the experienced insurance attorneys at Ver Ploeg & Marino. We understand how insurance companies operate, so we are often able to resolve insurance disputes quickly and effectively.

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