A Primer To Covering Your Personal Assets As A Director Or Officer | GB&A

A Primer To Covering Your Personal Assets As A Director Or Officer

For directors and officers considering a seat in the c-suite, the prospect of having your personal assets exposed can be a scary one. Before accepting that seat, it's important to understand how/when your assets could come into play and the scope of protection the company is affording you. Do not make the mistake of sitting on an uninsured board or thinking that a personal umbrella will provide coverage.

  1. Depending on where your company is incorporated, the statutory protections afforded by the state in which you are filed are your first layer of protection. Statutory presumptions such as the business judgement rule offer some insulation to officers and their personal assets by assuming that they had acted in good faith while making a particular business decision. However like any rules, there are exceptions, and when liability penetrates statutory protections such as this, the next layer of protection is found in the corporate charter/bylaws and indemnification clauses.
  2. The charter, bylaws and indemnification clauses contained within specify under what circumstances (and how) the board-members will be indemnified. Is indemnification allowed or mandated? Will defense costs be advanced or reimbursed? These are just the basics of many considerations to be addressed. For directors/officers that have not recently reviewed their charters and indemnification clauses, it is highly recommended that a proper review be performed by competent counsel. 
  3. The 3rd layer of protection is a D&O insurance policy. D&O policies have a few different layers, acting as: 1) balance sheet protection in the form of reimbursement to the entity for indemnifying their directors & officers (as outlined by the above mentioned bylaws/indemnification agreement), 2) entity coverage for claims in which only the entity is named in a lawsuit (for private companies this coverage can be very broad, for public companies this is generally limited to securities claims) and 3) direct coverage to the executives for claims such as derivative claims or insolvency where the entity cannot (legally or financially) indemnify it's directors & officers. When placing D&O insurance it is important to work with alongside your counsel and a broker familiar with such coverage - being that these policies are not standardized, the scope of coverage can vary drastically, not to mention that each company has a unique risk profile which should be addressed. The broker should also be capable of negotiating policy verbiage, which can go a long way in broadening the scope of coverage.

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