Is an economic downturn coming?
Yes, if most of the economists at nearly two-dozen financial institutions that do business directly with the Federal Reserve are right.
These economists, surveyed by the Wall Street Journal, point to several indicators that have traditionally signaled recessions. Among them:
- Bank lending standards have tightened, while loan demand has weakened to near levels typically seen around recessions.
- The Conference Board’s leading economic indicators have declined for nine consecutive months, dipping to levels that have historically preceded recessions.
Economics being what it is, these economists could be wrong. But, of course, they could be all too right. Anticipating the worst, the smartest c-suites are preparing for at least a quarter or two during which revenues could drop, costs could continue to rise – inflation hasn’t been tamed quite yet – and valuations could decline.
Amid all that, there’s one item we’d recommend to anyone making plans for a potential downturn:
Be sure you’ve bought a Directors and Officers Insurance policy and, if you already have one in place, double-check that your limits are adequate.
The “why” here isn’t hard to understand: every time the economy slows, companies suffer. And when companies suffer, so do stakeholders, a group that includes investors and creditors and even employees.
Stakeholders, as we know too well, can be a litigious bunch. There are penalties for filing frivolous lawsuits, but that’s hardly discouraged the rising tide of claims in recent years alleging fraud or breach of fiduciary duty.
Those alleged breaches, it’s worth noting, can include failure to adequately guard your company from cybercriminals as well as disregarding federal antitrust laws.
As such, a CEO running an uninsured (or underinsured) company could easily find themselves with little to no protection, forcing them to use personal assets to fund their own defense and leaving them personally liable for any resulting damages awarded by the courts.
Publicly traded companies with boards of directors (and teams of lawyers) know they can’t live without D&O. But the executives and owners of smaller, private companies are regularly sued, too, and so going without D&O leaves them open to what could be devastating claims.
D&O isn’t for for-profits only, by the way. Directors on the boards of nonprofits also can be protected from fiduciary liability by obtaining D&O coverage for themselves.
What does D&O cover, exactly?
As we’ve noted, D&O insurance reimburses board members and executives for the cost of defending themselves against claims made by shareholders or third parties for alleged wrongdoing. D&O insurance also covers monetary damages, settlements, and awards resulting from such claims. But what kind of wrongdoing are we talking about? Here’s a list of common scenarios covered by D&O:
- breaches of fiduciary duty;
- reporting errors;
- inaccurate or inadequate disclosure;
- misrepresentation in a prospectus;
- failure to comply with regulations or laws;
- creditor claims;
- competitor claims;
- employment practices and HR issues.
D&O also has a few common exclusions including:
- intentional criminal acts;
- illegal remuneration or personal profit;
- uninsurable fines and penalties.
A final thought about D&O and downturns
Trying to cut costs is a natural response to recessions. But eliminating or even reducing insurance coverage can leave your company vulnerable, exposing you to losses that far exceed any savings.
Finally, if you don’t have coverage in place, don’t wait. Getting an insurance company to accept you as a risk can become far more complicated amid financial losses.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. An employee-owned organization, we’ve been providing our clients with the confidence to face whatever lies ahead for more than 100 years. For more information, contact us online or call 877-440-3304.