Liability for directors and officers for private companies often supplements errors and omissions (E&O) insurance for managers. While E&O insurance will cover mistakes and associated damages due to company products, D&O insurance will cover actual mistakes in management and administration. These can include problems with employee relations as well as the monetary programs of the company. For this reason, many managers arrange D&O insurance at the time they hire their first employee.
Sources of Lawsuits
Lawsuits for directors and officers for private companies can come from several sources. Any time there is a perception of unfairness having to do with health plans, welfare plans, employee benefits, profit sharing, company-sponsored savings, or pension plans, a manager has potential exposure. In addition, directors can be held personally accountable for the business practices of their company. Many litigants have found it more effective to sue company officials rather than to go after the entire company.
The most common source of lawsuits comes from employees with discrimination or harassment claims. Managers should ensure proper coverage in this area.
Regardless of corporate protection, directors and officers for private companies put their personal assets at risk in the face of a D&O lawsuit, in the absence of protection. The company board of directors is also at risk. For this reason, the board will generally require that their executives procure proper D&O insurance, if they have not already done so. Finally, venture capitalist firms will require D&O insurance of executives in their client firms as well, in order to protect their investment.