You likely have insurance for your corporation in the event a lawsuit arises, but what about coverage for your C-suite employees and/or executive leadership? If your company faces litigation, there is a good chance your top executives will face legal action as well.
If you’ve ever heard of the “corporate veil,” you know corporate officers typically have some level of protection under a company’s policies. What you may not know is the courts can, at times, hold a corporation’s shareholders or directors personally liable for actions or debts of the corporation. This is most common with small companies, family-owned companies and those registered as an LLC. In the court’s eyes, business must always be conducted in agreement with provisions of corporate legislation. Leaders must keep business and personal assets separate.
A recent webinar on Chief Executive spelled out the risks individuals within a company can face and the insurance needed. “Typically, these plans provide coverage for claims of alleged or actual breach of duty, neglect, error, misstatement or omission,” according to Chief Executive. “A director can be held personally liable for actions taken by the company, which means that individual directors on your board will require you to provide D&O (directors and officers) liability protection to minimize the risk to their personal assets.”
The following scenarios should be considered:
- Company insolvency: In certain instances, creditors may have the grounds to sue directors personally. Wrongful conduct here could include stretching payables to pay creditors or employees or bringing claims against the business for unpaid salaries and wages.
- Debt acquisition: When a director knows they may not be able to pay off debts in the future, trading and acquiring additional debt still occurs.
- Personal guarantee: Leadership can overpromise or fail to present reasonable expectations while making decisions on behalf of the business.
The recent recession and recovery also highlight three sources of risk that may be faced by private company directors and officers: mergers and acquisitions, initial public offerings and bankruptcies.
Bankruptcies skyrocket during a recession and continue at an elevated pace in this slow recovery from the pandemic. Bankruptcies are particularly dangerous to directors and officers since a bankrupt company may not be able to indemnify them for defense costs or settlements if they are sued.
Some companies try to avoid tax payment by declaring bankruptcy and closing their doors. In this instance, they no longer have to pay the taxes that would have otherwise been due. Now with a clean slate, what stops them from opening again under a new name with no previous liabilities?
Making sure you have the right coverage for both your company and your officers is paramount to your company’s future.
Our team at Oswald Companies can review your coverage now so you and members of your leadership team won’t face liability later.
This article also appeared on bizjournals.com.
View more from Erin Blevins in her article, “The Hard Insurance Market: Why Personal Insurance Rates Continue to Rise.”
For aviation insurance check out our blog, “Insurance for Fractional Aviation Ownership.”
For more information, visit our Personal Risk page or contact:
Erin Blevins
Personal Risk Advisor
513.716.6001
Email
(Source: chiefexecutive.net)
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