HAHN AGENCY, INC.

Wrongful Acts

Directors and officers liability claims arise in large part by failing to follow their common law duties as Directors and Officers of an organization. This failure to follow these common law duties are known as Wrongful Acts. 

Directors and Officers Liability exposures encompass not only the directors and officers but every member of the non-profit organization including employees, trustees and volunteers. Any or all of these individuals can be named in a lawsuit. It is imperative that the named insured encompass all of these parties.

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These duties are as follows:

Duty of Diligence.  top

Directors and officers generally must act with the care that a reasonably prudent person in a similar position would use under similar circumstances. They must perform their duties in good faith and in a manner they reasonably believe to be in the best interest of the corporation. Prior to making a business decision, D&O’s must inform themselves of all material information reasonably available to them.

This duty requires not only reasonable behavior with respect to matters submitted for approval, but also requires reasonable inquiry and monitoring of corporate affairs. Although directors and officers are not insurers of the integrity of their subordinates or of general organizational performance, they are required to implement reasonable programs to promote appropriate organizational conduct and to identify improper conduct.

Duty of Loyalty.  top

Directors and officers are required to refrain from engaging in personal activities which would injure or take advantage of the organization. They are prohibited from using their position of trust and confidence to further their private interests. This duty requires an undivided and unselfish loyalty to the organization and demands that there be no conflict between one's duty to the organization and self-interest. Examples of prohibited conduct in this regard include:

• D&O's may not realize secret profits or unfair gain through personal transactions with or on behalf of the organization.

• D&O's may not compete with the organization to its detriment.

• D&O's may not usurp an opportunity of the organization.

• D&O's may not realize personal gain from the use of material, nonpublic information.

• D&O's should avoid even the appearance of a conflict of interest.
  
  

Duty of Obedience.  top

Directors and officers are required to perform their duties in accordance with applicable statutes and the terms of the organization's charter. D&O's may be liable if they authorize an act which is beyond the powers conferred upon a corporation by its charter or by the laws of the State of Incorporation. 

Non-profit organizations are frequently regulated by a multitude of statutes, rules and regulations with which outside directors are typically unfamiliar For example, charitable organizations may be subject to statutes regulating fund raising, political and business activities; hospitals may be subject to complex Medicaid reporting requirements; and publicly supported organizations may be subject to unusual terms and restrictions in various grant or financial assistance documents.

If the non-profit organization is exempt from federal or state income tax or if contributions to it are intended to be tax deductible, a myriad of additional restrictions and requirements may apply. For example, the corporation may jeopardize its tax exempt status if its earnings privately inure to the benefit of any individual, it if is operated for non-charitable purposes, if it engages in certain types of political or legislative activities, if it fails to file or obtain required returns or certificates or if as a private foundation it violates any of a series of rules prohibiting the appearance of self-dealing, large business holdings and the like. Failure to comply with these technical requirements may subject the D&O's to personal liability for the damage thereby caused to the organization and perhaps others.

Breach of these three basic duties form the core of the traditional claims against directors and officers. Further information on these basic duties along with the Business Judgment Rule can be found under the General Principles section of the Loss Control portion of this report. 

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