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D&O Insurance

What if Your Employees Sue You? (Here’s How to Stay Prepared)

directors and officers liability insurance

Directors And Officers Liability Insurance

In 2006, one of the world’s leading delivery services provider was sued by its employee for refusing to pay employee benefits. The court sided with the plaintiff and the company had to award him $90,000 in damages. (1) Very recently an airline company was slapped with class action lawsuit by an employee for forced unpaid leave. (2) Another recent example is of a leading telecommunication company being sued by an employee for age discrimination. (3)

Common Reasons Why Employees Sue

There aren’t uncommon examples. Every year, many employers get sued by their employees on various grounds. Some of the common reasons why employers get sued by employees include wrongful termination, discrimination, workplace harassment, retaliation, defamation, on-the-job injury, law violation, and unfair indiscipline.

The High Cost of Defense

In several such cases, the court may rule in favor of the company. However, the company will still incur the defense cost, as well as other legal costs. If the case went the plaintiff’s way, the compensation the company is likely ordered to pay could be quite high. These costs could significantly weigh down any organization’s financial position, even pushing them towards bankruptcy.

This is why every company – big or small – is recommended to be adequately prepared in case their employees sue them. They should have the financial cushioning to defend themselves against the made claims at the court of law.

Buying D&O Policy for Financial Cushioning

Lawsuits by employees are usually levelled against either on the company or the top management in the company, which includes the directors and officers. This is why the priority – in addition to ensuring the employees don’t sue you in the first place – should be given in protecting the directors and officers at the company. Having a directors and officers liability insurance becomes important here.

What Directors And Officers Insurance Covers?

D&O insurance is among the most popular types of business insurance. The policy provides coverage to the directors and officers of the company from personal losses if they are sued as a result of serving the business in their respective roles. It covers the defense cost, legal fees, damages cost and other expenses that they incur because of the lawsuit.

Directors and officers liability insurance shields directors and officers from lawsuits by many different parties, including the employees.

Having a Proper Plan

1. Preventing the Problems

Covering directorsliability isn’t an end-all-be-all solution. The insurance can protect you only so much, depending on its coverage. This is why the first part of the solution is to prevent the possible problem in the first place.

Every business owner should be careful in managing employees; this is especially true if the company has previously been sued by an employee. Every need, demand, and complaint of the workforce should be diligently addressed.

The employers should be aware of the common reasons employees sue – and then they should take sufficient measures to ensure these ‘reasons’ do not arise in their organization. They must adhere to the labor law of the land, as well as the basic code of conduct.

Having a fair understanding of the employees’ rights can take them a long way in creating fitting (and transparent) employment practices, policies and contracts that can be objectively scrutinized if any legal event arises.

In addition, proper training of employees can be pivotal in avoiding possible lawsuits by them.

2. A Defined Checklist

With the above point made, despite all the efforts on your end, there will always be a few employees who are unhappy and unsatisfied. And they are the ones who can sue you. So, once you have taken adequate steps into ensuring the problem never emerges in the first place, you need to have a checklist that is to be followed if an employee sues you anyway.

So, do know which lawyer or law firm you would approach when sued by an employee. Have a fair idea of the actions you would have to take on your end and how this legal proceeding will go forward. At the same time, get in touch with your insurance company – or an insurance broker – immediately once there is any such notification or intimation. They would explain to you the process of claiming your directors and officers liability insurance, as well as various other details of the policy, including the deductibles.

Having a well-defined checklist is incredibly helpful in taking quick and efficient action against a legal claim. It also helps in ensuring minimized impact on the business proceedings and operations.

Explore Other Insurance Options

The lawsuits by employees can come in many forms and for many reasons. So, at times, depending on the kind of business you run and the industry you’re in, protecting your directors and officers might not be enough. You would need more and different kinds of coverage from other liabilities. So, in addition to D&O insurance, you should also explore and purchase Employment Practices Liability Insurance (EPLI). EPLI insurance is a very popular insurance policy for employers that cover unfair acts committed against employees.

Although a D&O liability insurance covers EPLI claims, it is always recommended for companies to buy a standalone EPLI insurance. One of the primary reasons for this is an increase in lawsuits from employees. If an EPLI insurance is available, lawsuits from employees can be covered under this insurance, which will ensure sufficient protection available for other types of litigations on directors under the D&O liability insurance.

Consult a licensed insurance broker to establish your risks and realize insurance needs. They can assist you in finding the right business insurance policies from trusted insurance companies.


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