Common D&O Exposures 

 
 
 

What are the risks?

For corporations large and small, the legal costs associated with a lawsuit against the directors and officers can be sizeable, resulting in complications that impact both the corporation and its directors and officers. Although D&O insurance provides a last line of defence for corporations and their board of directions, the best way to protect against a D&O claim is strong risk management and corporate governance, helping them to avoid claims entirely. Understanding these risks and exposures is the first step in helping mitigate the exposure to claims. Below is a list of some of the most common areas of exposure that are faced by corporations and their directors and officers.

Employees

Almost all businesses have employees or potential employees. With that comes exposure as employees are one of the largest sources of claims against directors, officers, other employees, and the corporation. If employees are mistreated or feel they have been mistreated at any time of their employment, they may bring their concerns forward with a claim.

Common claims from employment practices include the following allegations:

  • Wrongful dismissal

  • Constructive Dismissal 

  • Discrimination 

  • Workplace and sexual harassment 

  • Workplace bullying 

  • Breach of employment contract  

  • Failure to address health and safety concerns  

Competitors

As organizations attempt to grow their market share, management teams must ensure that growth is achieved through fair business practices. If an organization’s competitors believe that they have been unfairly disadvantaged by dishonest or illegal behaviour, they may seek legal recourse.

Directors and officers can be brought into legal actions for a range of wrongdoings, including the following allegations:

  • Breaches of intellectual property 

  • Misappropriation of trade secrets 

  • Collusion 

  • Anti-competitive behaviour 

What’s more, directors and officers may be held liable for actions that are perceived as misleading or defamatory, with claimants seeking damages for their alleged losses.

Creditors

A management team has the responsibility of monitoring an organization’s financial position and its ability to meet debt obligations as they become due. If an organization becomes insolvent, creditors will often scrutinize the decisions of directors and officers to see if they can be held personally responsible and will sometimes pursue executives in an attempt to recover outstanding funds.

Common allegations by creditors against directors and officers include the following:

  • Breach of fiduciary duty 

  • Breach of duty of due care 

  • Negligence 

  • Deliberate misconduct 

Government and regulatory Authorities

Government and regulatory authorities monitor the environment in which organizations operate. These bodies help ensure that directors and officers and the organizations they control conduct their activities in a fair and lawful manner.

Government and regulatory bodies monitor compliance with a broad range of laws, including the following:

  • Corporations law: Governs the ownership and management of organizations 

  • Securities law: Governs the administration of publicly listed companies 

  • Consumer protection law: Governs the way in which organizations distribute products and services to consumers 

  • Occupational health and safety law: Ensures that organizations maintain a safe workplace 

  • Taxation law: Governs the taxation of organizations and individuals 

  • Environmental law: Ensures that industry participants adhere to environmental restriction

For directors and officers, the enforcement power held by these bodies presents a significant exposure to D&O claims. If regulators discover that wrongful conduct has occurred, they may pursue legal action against the organization and the executives involved.

Shareholders

Due to their financial investment, shareholders have an incentive to monitor an organization’s ongoing performance and ensure that directors and officers are acting in the organization’s best interests. With potentially large sums of money at stake, if shareholders are not pleased with an organization’s direction, they may take measures to protect their investment.

If it appears that management has breached their duties to the detriment of an organization, shareholders may bring a claim against directors and officers themselves. If shareholders wish to bring a claim against executives, legal proceedings typically come about in one of two ways:

  1. Direct action—In a direct action lawsuit, a shareholder or group of shareholders bring a claim against management for damages in their interests as shareholders. In this instance, shareholders are the benefactors of any financial settlement. 

  2. Derivative action—In derivative proceedings, shareholders—acting as the organization—sue the directors and officers. In this form of litigation, shareholders generally claim for damages caused to the organization, with the beneficiary of any settlement being the organization itself.  

Customers

While customers dictate an organization’s success, disputes from these individuals can bankrupt a company altogether. In fact, customer disputes can lead to lawsuits against an organization, as well as their directors and officers. Commonly, lawsuits from customers relate to contractual disputes, debt collection, the costs or quality of products or services, the refusal to extend credit and discrimination.