From 2008 to 2016 the Sackler family, which controls Purdue Pharma, received more than $4 billion in profits by aggressively marketing and selling OxyContin, despite several lawsuits and full awareness of the drug’s highly addictive properties, according to a lawsuit filed by Massachusetts Attorney General Maura Healey on January 31.
The lawsuit alleges members of the Sackler family engaged in efforts to actively boost sales of the drug, willfully disregarding the potential harmful effects of their actions. Healey outlines her case in 274 pages of damning statements, including “eight people in a single family made the choices that caused much of the opioid epidemic.”
Despite Purdue Pharma’s efforts to suspend a Massachusetts judge’s order making documents related to the lawsuit public, the suit has been widely circulated and gained global attention.
Ongoing, mass litigation targets Purdue Pharma’s assets as well as the Sacklers’ personal fortune. While this case is extreme in its severity and scope, Directors and Officers (D&O) Insurance can help companies and their officers fund legal defense costs, even before formal allegations are made. Such coverage is important in helping companies and those directors get the representation they need, said Heather Schaaf, Underwriting Director, Executive Liability, Burns & Wilcox, Chicago, Illinois.
Companies of all sizes should consider purchasing D&O Insurance, Schaaf said, as such legal costs can be prohibitive for many private business owners. D&O Insurance can protect the personal assets of one or more directors when costs of a claim cannot be indemnified by the company.
“The purpose of D&O is really to protect an officer and their personal assets (from action that may have happened while working on behalf of the company) and the company’s assets,” Schaaf said. A $1 million total limit is typically the minimum suggested for many U.S.-based small to mid-sized private businesses, she added.
A D&O policy can ensure the continued existence of some privately-held companies in cases where the cost of legal defense exceeds their net worth and corporate indemnification is unavailable. Any allegation of a wrongful act brings associated costs because it must be defended. In the Purdue Pharma case, the company issued a forceful statement in response to the lawsuit that reads in part: “In a rush to vilify a single manufacturer whose medicines represent less than 2 percent of opioid pain prescriptions … , the complaint distorts critical facts and cynically conflates prescription opioid medications with illegal heroin and fentanyl.”
The policy costs and limits for publicly-traded companies are higher because lawsuits are common given the availability of information about its directors, Schaaf said. As such the D&O Insurance required is more complex. “The amount of revenue a company has and its total assets go a long way to determining how it is underwritten,” she added.
Need for D&O Insurance grows in era of lawsuits and liability
D&O Insurance can also help protect officers from lawsuits related to public comments on social media and elsewhere. Tesla founder Elon Musk’s 2018 tweet (“Am considering taking Tesla private at $420 – Funding Secured”) prompted negative press and triggered an investigation and lawsuit from the U.S. Securities and Exchange Commission (SEC). Musk continued to provoke the SEC in the days following his tweet.
Former Nissan executive Carlos Ghosn currently faces criminal charges for a number of alleged financial misdeeds. Two weeks ago the U.S. Justice Department filed charges against telecom firm Huawei and its CFO Meng Wanzhou for stealing trade secrets and obstruction of justice.
Directors and officers of organizations who face allegations, criminal or otherwise, would benefit from D&O Insurance, though most would not need the high-limit policies required to defend the Sacklers, Musk, Ghosn or Wanzhou.
In 2017 the Equal Employment Opportunity Commission (EEOC) received more than 540,000 calls, 155,00 in-person inquiries, and obtained almost $4 million in damages on behalf of employees in lawsuits over the types of employment discrimination and offenses covered by D&O or Employment Practices Liability (EPL) Insurance. The average D&O claim is $175,000 and the average policy premium for a $1 million limit ranges from $4,000-8,000. Covered claims can include breach of contract, misappropriation, liability for unpaid sales tax, trademark infringement, loan defaults, misrepresentation in a merger and acquisition and more.
Representing the highest level since 2001, a 2017 NERA Economic Consulting report revealed that class action filings increased by 44 percent that year. The rise in employment discrimination and cyber risk claims also points to D&O Insurance as a worthwhile investment. Between 2013 and 2016 a group of former officers and directors for Yahoo paid nearly $30 million to settle charges of breaching fiduciary duties related the cyberattacks of three billion user accounts.
D&O policies cover a wide range of liabilities
While the benefits of D&O Insurance policies in Canada are similar to those available in the U.S., there are a few notable differences, said Nathan Rose, Senior Underwriter and Business Development Specialist, Burns & Wilcox Canada, Toronto, Ontario. D&O policies in Canada include coverage for EPL, whereas such liabilities are generally covered by standalone EPL policies in the U.S.
“The (business climate) is generally not as (litigious) in Canada as the U.S. but these policies still provide important protection,” Rose said. “The more coverage you have the better protected you are and if you have a low risk profile, it will be extremely affordable.”
Besides legal costs, D&O Insurance often covers investigative costs associated with a financial or accounting review, Schaaf said. Such services can help a company and its directors respond effectively to allegations.
Other sublimits available with D&O policies in the U.S. include coverage for costs associated with responding to a subpoena, Health Insurance Portability and Accountability Act (HIPAA) violations and merger and acquisition details, Schaaf said. A suit brought by a government agency brings additional regulations, fees and other costs that need to be addressed, increasing short-term costs, Schaaf said.
“D&O policies offer an additional layer of protection from costly professional liability exposures,” Schaaf said. Policies can be customized for nonprofit organizations as well as public and private for-profit companies. Many board members for nonprofits do not realize they may be held personally liable for actions of the organization, Schaaf added.
Additionally, D&O Insurance allows organizations to attract and retain qualified executives by ensuring they will be adequately protected in the event of allegations or lawsuits against them as individuals and against the company.
Organizations with a history of financial instability are at much higher risk of being denied coverage, or securing less coverage at greater cost, Schaaf said. Other underwriting considerations include management or director turnover, unusual ownership structures and past claim history.
Tech-related industries, the automotive sector, financial services and those involved with mergers and acquisitions are more likely to face litigation and therefore are at higher risk for needing D&O Insurance, Schaaf said.
“You want to have it to protect your (executives) against unfair trade practices which you will see with family-owned businesses,” Schaaf said. “We encourage clients to buy an adequate limit relative to their total assets for their own protection because it is peace of mind.”
As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent about D&O insurance policies that might be right for you.
