Does your veterinary practice operate under a board of directors? Do you serve on the board or as an officer responsible for management decisions that have a direct financial impact on others associated with the organization? If so, directors and officers liability insurance, often referred to as D&O insurance, should be an important component of your organization’s insurance and risk management portfolio.
D&O protects the personal assets of anyone who serves as a director or officer of a for-profit business, privately held firm, non-profit organization or educational institution against actual or alleged wrongful acts committed by the person in their appointed capacity. D&O policies also may protect committee members, managers, employees and spouses. An increasing number of policies cover domestic partners.
D&O policies cover claims resulting from managerial decisions that have adverse financial consequences to the business entity. Such a policy can help reimburse a business or nonprofit for legal fees and other costs incurred in defending covered individuals against a lawsuit.
Common examples of when directors and officers are exposed to claims arising from their managerial roles include:
- Fraud.
- Breach of fiduciary duty.
- Theft of intellectual property.
- Lack of corporate governance.
- Misrepresentation of company assets.
- Misleading statements.
- Unfair recruitment of a competitor’s customers
- Inappropriate use of company funds or assets.
- Failure to comply with workplace laws.
Those who typically sue directors and officers are:
- Employees
- Investors
- Vendors
- Competitors
- Customers
Case Study 1
A regional emergency clinic was created and incorporated through the collective investment of 38 veterinarians looking to improve after-hours patient care and relieve individual hospitals from providing emergency duty. A medical director and hospital manager were hired to supervise day-to-day operations, and a board of directors was appointed to oversee business operations. More than once, questionable hiring practices and poor administrative oversight forced investors to provide additional unanticipated money to keep the clinic solvent.
When the hospital was once again on the brink of insolvency, several investors sued the board of directors, medical director and hospital manager, alleging a lack of appropriate corporate governance, misappropriation of funds and repeated failure to comply with all applicable workplace laws. The organization’s D&O policy protected all parties, including the business entity, and covered a significant portion of the legal expenses. As is frequently the case, the lawsuit was settled out of court.
Case Study 2
Two veterinarians were 50-50 partners in a well-established incorporated clinic. The older doctor retired from active practice but remained a silent partner, which provided a major source of his retirement income. The younger owner remained engaged in the practice and accepted responsibility as the managing partner and overseer of the day-to-day operation.
Following an extended period of poor financial performance, the silent shareholder insisted on a third-party financial audit of the business. The results were alarming: A large sum of revenue was unaccounted for. Further investigation determined that the office manager had embezzled at least $200,000 over more than two years, but poor record keeping left the exact amount in doubt. The managing partner intentionally did not inform his silent partner that the office manager had been given complete control of all accounting responsibilities and signatory authority over the hospital’s financial accounts.
The silent partner sued the managing partner, claiming breach of fiduciary duty and lack of corporate oversight resulting in significant monetary loss to the corporation and its shareholders. Unfortunately, a D&O insurance policy was not in place. Therefore, the younger veterinarian was required to use personal assets to pay all legal-defense expenses and judgments.
Ultimately, the managing partner was forced to sell his portion of the practice to meet his financial obligations associated with the lawsuit.
How D&O Policies Are Designed
A directors and officers insurance policy has three basic components: sides A, B and C. Publicly listed companies typically elect all three sides while private and non-profit companies along with educational institutions use only sides A and B.
SIDE A
- Coverage description: Protects the personal assets of individual directors and officers.
- Who is the insured? Individual officer.
- What is at risk? Individual directors’ or officers’ personal assets.
SIDE B
- Coverage description: Reimburses the business entity for expenses related to a legal obligation to indemnify directors or officers for claims payments and defense costs.
- Who is the insured? The business entity.
- What is at risk? The business entity’s assets.
SIDE C
- Coverage description: Protects the company itself.
- Who is the insured? The business entity.
- What is at risk? The business entity’s assets.
D&O policies have additional important provisions:
- The cost of legal defense is within the policy limits, meaning such expenditures reduce the remaining policy limits on judgments or settlements. This contrasts with a standard general liability policy in which the legal defense costs are typically outside the policy limits and do not erode overall policy limits.
- Coverage is in place only during the effective term of the policy. Again, this is in contrast to a standard general liability policy, where the coverage in place when the alleged illegal activity occurred will respond to a claim even if the acts are reported when the policy is no longer in effect.
- A per-claim deductible is stated. A standard general liability policy typically pays claims on a first-dollar basis, meaning no deductible.
- If a company fails to disclose relevant information or willfully provides inaccurate information during the policy application process or when a claim is filed, the insurer may avoid coverage.
- Defense costs arising from criminal and regulatory investigations or trials of individual directors or officers may be covered. It is not uncommon for civil and criminal complaints to be brought against individual directors or officers at that same time an errors-and-omissions claim is brought against the entire management team.
Common D&O policy exclusions include:
- Fraud.
- Bodily injury.
- Property damage.
- Fines and penalties.
- Intentional illegal activity.
- Intentional non-compliant acts.
- Claims made under a previous policy.
Management Liability Policies
Directors and officers insurance is one component of a group of coverages typically referred to as management liability policies. These individual coverages may be provided as a combined policy, single combined policy or combination.
In addition to directors and officers policies, the most common management liability policies include:
- Employment practices liability. (See my previous article at http://bit.ly/2Z9PPgx.)
- Fiduciary liability.
- Cyber/network liability. (See my previous article at http://bit.ly/34LOVb3.)
- Special crime coverages such as kidnap, ransom and extortion.
When applying for a D&O policy, be prepared to provide the insurance company with:
- A fully completed application.
- Financial information.
- A list of shareholders.
- Any pending claims.
- Any pending mergers or acquisitions.
Due to the variation and complexity of directors and officers insurance policies, coverage should be designed to address your organization’s specific exposures. I recommend consulting with legal counsel and an insurance agent who has veterinary industry experience.
Protect & Defend columnist Dr. Ed Branam is veterinary and animal services program manager for Safehold Special Risk Inc. He serves on the American Veterinary Medical Association’s Legislative Advisory Committee.