When a business is exposed to complex litigation, the stakes can be extremely high – particularly when individuals are part of a lawsuit.
One of the primary benefits of incorporation is that the structure shields officers and directors from personal liability arising from actions related to their corporate duties.
That said, there are various circumstances under which these same individuals could be liable for negligence or financially harmful omissions. For instance, individual officers and directors can be a party to a lawsuit if the case involves allegations of:
- Intentional participation in wrongdoing or negligence
- Knew about misconduct
- Breached an independent duty of care
- Authorized unlawful acts
Unless individuals prove that they were acting in good faith and in the best interests of their company, they could be named as a defendant in a lawsuit.
A case highlighting individual’s exposure to lawsuits
One recent case can serve as an example of this. Plaintiffs in a lawsuit against United Health Group recently added the chief financial officer its complaint accusing the defendants of putting business interests ahead of its employees and retirement plan participants.
According to the lawsuit, the CFO approved decisions not to remove underperforming target-date funds and instead kept them on as the default investment option for the company’s 401(k) plan. The lawsuit argues that the CFO directed leadership to manage the retirement plan irresponsibly.
Tips for protecting leaders and businesses
Because there can be an enormous amount of resources and money on the line when someone sues officers and directors, it can be crucial for these parties to pursue measures to prevent or reduce individual liability.
Parties can discuss various legal options with an experienced attorney familiar with the intensive and complex nature of these claims. Possible measures might include securing Directors and Officers (D&O) Liability insurance coverage, exculpation, indemnification or resolving disputes outside of court.