Why Contractors need DO Why Contractors need DO

Why Contractors need D&O

Why Contractors need D&O • What is D&O Coverage? – A side: liability coverage for individual directors and officers of the parent organization (termed “directors and officers liability insurance”). – ”As noted above, Side A of a D&O policy insures losses that are not indemnified by the corporate entity, a situation most frequently occurring (1) when the corporate entity is financially unable to indemnify its directors and officers, (2) when the defendant directors and officers must pay a settlement or judgment in a shareholder derivative lawsuit or (3) when a claim is made against directors and officers for which, according to its bylaws or the applicable statute, the corporation is not required to provide indemnification.

Why Contractors need D&O – B side: is corporate reimbursement coverage, which reimburses the parent organization for payments it is legally obligated (or permitted) to make in indemnifying its directors and officers for liability claims made against the directors and officers. – C side: is coverage for the parent organization for claims relating to the securities of the corporation, also termed “entity securities coverage. ”

Why Contractors need D&O • • • It’s not just for securities related transactions. “I’m not publically traded!” “I am the sole shareholder. ” “This is a family business. ” So what can happen – Never ask “What can happen – you will find out!

Why Contractors need D&O • Shareholder claims • Client Claims • Vendor Claims 46% 33% 21%

Why Contractors need D&O • Scenario: ABC Corp. is a privately-held family business engaged in the distribution of lighting equipment. When ABC experienced an upswing in profits due to high production and sales, the majority shareholders voted to approve a large compensation package for the CEO, who is the family patriarch and founder of ABC Corp. Mr. Jones is a 20% shareholder in ABC Corp. and is a distant cousin of the CEO. Mr. Jones was upset, as he felt that the majority shareholders, the three children of the CEO, were siphoning off the recent corporate earnings through the high compensation package and left Mr. Jones with little reward. Mr. Jones filed a lawsuit alleging breach of fiduciary duty and minority shareholder oppression. • Outcome: After incurring $75, 000 in lawsuit defense costs, ABC agreed to pay Mr. Jones $200, 000 representing a percentage of the increased profits.

Why Contractors need D&O • Interference with Business Relations: During a press conference the president of a service company stated that the success of his company was due in large part to a competitor’s lack of customer service and inferior product. The competitor filed suit alleging that the president had negligently interfered with business relations. The jury agreed and awarded the competitor $2 million in damages. The attorneys’ fees for this case amounted to $150, 000.

Why Contractors need D&O • Supplier Detrimental Reliance: A retailer advised one of its suppliers that it ought to increase inventory because business was expected to increase significantly. Business did increase for the retailer but it decided to use a different supplier for the increased inventory. The original supplied sued the retailer alleging that he relied on the retailer’s promise of more business and suffered damages as a result of having relied on that promise. The matter was eventually settled for $500, 000.

Why Contractors need D&O • An employee of an excavation company was fatally injured after accidentally digging into electrical cabling. Work. Cover investigated the circumstances surrounding the fatality and the Office of Public Prosecution served a Charge Sheet and Summons on the excavation company, alleging the company had breached various sections of the Work Health and Safety Act. The organization vigorously defended the action for three years and the Office of Public Prosecution subsequently discontinued the matter; however Defense Costs of $343, 000 were incurred.

Why Contractors need D&O • Executive Risk – It’s D&O and more – Add Employment Practices – Add Crime – In some cases add Cyber