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Directors & Officers Liability

Gallagher Healthcare :: Industry Insights
By Terra Andrews | 6/17/2014

Lawsuits within healthcare organizations don’t only come from medical malpractice or professional liability claims. Some of the most expensive cases result from suits against the directors and officers of the organization. Directors and officers liability, more commonly referred to as D&O, is especially important within the healthcare industry. Claims and lawsuits can come from many different parties, including shareholders, physicians, creditors, employees, patients, etc. Let’s take a closer look at D&O coverage. 

What Is It? 

Directors and officers liability provides protection for the actual board members and corporate officers of the company, should they be accused of something as it relates to their management of the organization. D&O is one line of coverage that is a part of the broader term known as management liability. It also provides protection for the organization itself, should it be named in a claim or suit. This can include allegations such as mismanagement, misrepresentation, fraud, breach of fiduciary duties, breach of contracts, etc. A basic D&O policy would cover the legal costs or defense expenses associated with a claim as well as the indemnification or settlement amount, should there be one. For healthcare organizations, there are additional coverage offerings that can be negotiated and are specialized for facilities. These include things like EMTALA, HIPAA, and regulatory acts, to name a few. 

Why Would We Need It? 

In today’s litigious society, a director or an officer of a healthcare organization can be held personally liable for the choices and mistakes of the company. This means that their personal assets could be at stake for negligence within their roles. This type of management liability is not covered under a typical errors and omissions or general liability policy. Regardless of whether the company, directors, or officers are found to be innocent or not, the legal costs alone can run a high price tag. In some cases, the legal expenses can end up costing more than the judgment or settlement itself. Even if the claim seems bogus and has no merit, they will still have to pay to defend themselves in the case. For the entity as a whole, a D&O claim can have damaging effects on the cash flow and financials of the company. Purchasing a proper D&O policy would shift a lot of the financial strain over to the insurance carrier.

Examples of Possible Claims 

  • A suburban not-for-profit hospital experiencing severe financial difficulties entered into a strategic business alliance with a third party. Under the agreement, the third party would manage the day-to-day operations of the hospital and eventually acquire it. The contemplated sale was unsuccessful, and the hospital filed for bankruptcy protection. The creditors sued the hospital’s directors and officers, alleging mismanagement in the period prior to insolvency as well as breach of fiduciary duty in not accepting a competing offer to sell, which was not subject to financing contingencies. The defendants argued that the competing offer would not have satisfied the outstanding obligations and would certainly have forced a bankruptcy filing. The defendants also argued that their decision to accept the chosen offer was protected under the business judgment rule. In the end, the parties negotiated a settlement with the creditors in excess of $3 million and incurred over $2 million in defense costs.
  • A physician/cardiologist who was a pioneer in cardiology at the hospital and performed half of all cardiology procedures at the facility approached hospital management about developing a cardiology health center. Management rejected the idea. The physician decided to pursue the project herself by securing private funding. The hospital initiated a peer review process that resulted in the revocation of the physician’s staff privileges, thereby eliminating her only forum to practice cardiology in the area. The physician sued the hospital, its board, and certain individual physicians under federal and state antitrust statutes, alleging improper peer review proceedings, unfair competition, defamation, and intentional interference with business and contractual relations. The plaintiff claimed damages that included present and future income, mental anguish, and emotional distress. The hospital prevailed on a motion for summary judgment. Its total defense costs, including appeals exceeded $2 million.
  • Nursing home residents filed a lawsuit against the home, alleging fraud and misrepresentation. According to the suit, the nursing home misrepresented certain terms with respect to the provision of lifetime care to the residents and had unjustifiably raised its monthly fees. The residents claimed that the home had taken financial advantage of the residents, used intimidation tactics against them when they brought the fee discrepancies to the attention of management, and failed to adequately maintain the facility. In their suit, the residents sought compensatory and general damages as well as punitive and exemplary damages, including treble damages and penalties under civil code. 
  • A motion for summary judgment was denied, but the matter settled before trial for nearly $450,000. The nursing home’s defense costs exceeded $120,000.

No matter if you’re a public, private, or non-profit entity, exposures to D&O claims exist. It’s important for the management team of an organization providing healthcare services to weigh in on their potential liabilities and have a clear understanding of the risks. Consult with a broker to help evaluate these exposures and ensure that you have the proper protection and coverage in place. 

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