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Directors & Officers Liability

In today's litigious society, a number of courts have awarded millions of dollars to plaintiffs based on value owed to them by the management of both for-profit and non-profit entities. There is a perceived liability that stems from a breach, lack of due diligence or non-performance in the duties that result in a loss of value of the entity or a wrongful act to a person (third party).

Directors and officers were held personally liable for payment to the third party. They are bound by duty towards the company itself, shareholders, employees, creditors, customers, competitors and members of the public. The Directors' and Officers' Liability Insurance policy has been designed to protect the members of the board from financial liabilities imposed upon them.

This policy is necessary for directors and officers of every company if they wish to avoid painful litigation. The policy addresses a number of perils that may be imposed upon the entity and its directors and officers. A sample of risk covered:

  • Trustee accountability and responsibility
  • Administrative liabilities
  • Failure to manage
  • Inaccuracy in financial statements
  • Lack of good faith
  • Misappropriation of funds
  • Unauthorised loans or investments
  • Using inside information
  • unwarranted dividend payment, salaries or compensation
  • Misleading statements
  • Wrongful dismissal of an employee
  • Misrepresentation in acquisition agreement for the purchase of another company.

The extent of indemnity being severely restricted by the companies' act will reimburse the extent of legal costs expended only if the Director/Officer successfully defends the act taken against him.

Also, coverage is available on a 'claims made' basis and applies only to claims made against the Board of Directors during the policy period, irrespective of when the wrongful act occurred. Coverage is usually arranged on a 'blanket' basis - embracing all past, present and future directors and officers.

Indemnity is primarily provided in respect of the director's legal liability arising from a 'wrongful act' committed by him whilst acting as a director.

Specifically, this includes the costs of representation and defense in civil or criminal proceedings and the costs of representation if required to attend an official investigation or inquiry into the affairs of the company. In such instances, an allegation of a wrongful act on the part of the director may not be a prerequisite to indemnity for costs; his attendance to give evidence may suffice.

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