Director and Officer Litigation Is on the Rise, Correlating Closely With the Economic Downturn

Director and Officer Litigation Is on the Rise

The recession and the resulting market turmoil has seen many businesses go bankrupt, with many more ceasing trade and entering liquidation. Some analysts will blame the economy, others would argue that the company didn’t innovate enough to save themselves; in the latter instance the individuals that tend to receive the blame are company officers and directors.Therefore, as a direct result of the recession, the number of litigation cases taking place against these Officers and Directors for their performance (or lack of) during the economic downturn, has increased.For many, this has come as an unwelcome surprise. Research undertaken by BusinessInsurance.com has shown that a small number of high-profile litigation cases have led to a wave of similar such legal actions against small and medium-sized businesses alike in the United States and there is speculation that the same may happen here in the UK.This is problematic, as the SME sector is often cited as the engine of growth in developed economies, where they provide the greatest number of jobs compared to employment levels in large enterprises in the same country. SMEs are often seen as change agents and innovators that continually drive the competitive, creative waves of destruction. If all of their directors and leadership talent are being sued, it bodes poorly for the sector as a whole and their ability to help us out of the hangover of recession.With that said however, many insurance experts think that this wave of litigation spreads more easily in the SME sector because of a lack of legal coverage. They say that larger businesses and corporations understand the scope of their vulnerabilities and will usually have insurance policies to cover every eventuality. Small to medium-sized businesses on the other hand, rarely see beyond their immediate shareholders and shun any insurance costs that they deem to be unnecessary. So in situations like these, many directors and officers without insurance are wide open to legal action, putting their personal assets at risk.Although many business insurance providers, see this trend as an opportunity to educate business people at large; to remind them that when the going gets tough, the last thing you should be doing is jettisoning your only form of legal cover to skimp on costs.The wave of lawsuits filed against these mid-sized firms, have come from a number of entities including employees, competitors, vendors and regulators; which just goes to show how much scope there is for legal repercussions beyond the usual shareholders. Many business owners, directors and officers are finding that the consequences of their business decisions are having a much more profound impact on their personal lives. Even if they do have cover, just the threat of legal action can be a daunting, looming shadow. So if you happen to be directing a corporate path, make sure you have directors insurance.

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