When disputes or claims arise against corporate officers, questions immediately surface about the use of liability insurance. In Maryland, companies sometimes rely on policies like directors and officers or errors and omissions insurance to shield management-level individuals from personal financial fallout. But, can a business require an officer to tap into their liability insurance coverage?
Understanding liability insurance
Liability insurance, including D&O and E&O, is designed to protect individuals who serve in leadership or advisory roles. Normally, D&O coverage is a personal liability shield for holders if they are accused of mismanagement or some other corporate wrongdoing. E&O insurance protects professionals against claims that their mistakes or oversights caused harm. These policies help prevent a single oversight from leading to severe personal financial setbacks.
Usually, a company cannot simply force an officer to use their personal liability insurance. However, there are scenarios where the business’s own governing documents or agreements grant the company the power to require use of insurance coverage. Key instruments include employment contracts, corporate bylaws and indemnification agreements. If these documents specify that officers must rely on certain insurance policies when disputes arise, the officer is usually bound by those terms.
Situations where it may be required
If the officer’s contract contains language compelling them to use available liability insurance in the event of a claim, the company can enforce that provision. Some organizations have bylaws spelling out when and how officers should use the company’s insurance, and they can carry legal weight. Finally, businesses often draft indemnification agreements that require officers to seek coverage under the company’s insurance policies first, before looking elsewhere.
If none of the governing documents mention insurance usage requirements, it may be harder for the company to compel an officer to rely on a particular policy. And, insurance contracts often include exclusions. If the claim does not fit within the policy’s coverage, the officer cannot be forced to use it.
While a Maryland business cannot simply demand that an officer turn to their personal liability insurance absent pre-existing agreements, well-structured employment contracts, bylaws and indemnification documents can give the company this authority. Both businesses and officers should be aware of these contractual nuances to avoid confusion and ensure everyone’s interests are properly protected.