Why Privately Held Corporations Should Have D&O Insurance
Directors and officers liability insurance (D&O insurance) is one of the most important, yet least understood coverages. D&O insurance offers critical protection to the thought leaders who are entrusted to make the most difficult decisions within their organization. These difficult decisions can lead to accusations of wrongdoing and can put the personal assets of these leaders at risk. There is a common misconception that only public companies need to purchase D&O, however, directors and officers liability insurance should be an integral party of any private company’s risk management plan.
What is D&O insurance?
D&O insurance provides protection to corporate management from claims arising from the decisions and actions taken within the scope of their regular duties. D&O insurance can be triggered when lawsuits arise alleging accusations of wrongdoing with how leaders manage and operate their organization.
Many private companies purchase employment practices liability but not D&O. We typically hear, “We don’t have a board”, “We don’t need this coverage!”, “We just can’t see our employees suing us” or “It’s too expensive.”
However, a disturbing fact for private companies is that directors and officers can, and usually do, get personally named in a lawsuit asserted against the company, exposing their personal assets.
Where would the money come from if you or your directors or officers were named in an unexpected lawsuit or dispute for an alleged wrongdoing?
In most states, a corporation is required to indemnify its directors and officers for personal liability. However, situations arise where the company cannot or will not defend a director or officer, leaving them to defend themselves. Cases can exist when the company is not in a financially solid position, when they become insolvent, or are prevented from providing indemnification by law putting directors’ and officers’ personal assets at risk. This is especially concerning for closely held companies, as the fewer owners and/or directors and officers there are to sue, the more principal/founders personal liability is exposed, leaving their personal assets at risk. Even if indemnification is allowed by the company, defense and/or settlement costs can seriously hurt its balance sheet.
If your organization purchases a D&O policy, it can act as a solid backstop to mitigate and/or solve what could be a devastating financial impact of unforeseen business litigation. Not having this insurance creates a serious exposure to your business and every member of a company’s management team. Companies, no matter what size or industry, should carefully consider the purchase of D&O insurance. It is a key risk management tool for any private company protecting both the financial assets of the company and the personal assets of the individuals. It is a great tool for reducing risk and giving directors and officers peace of mind. The fact of the matter is, no director or officer should face the ordeal of defending against a D&O claim without having adequate D&O insurance coverage.
Sources of D&O Claims
Claims can come from anyone who believes they have been harmed due to a management decision that was made by the company (not just shareholders). D&O claims are costly, they can be complicated, stressful, and drag on for years.
D&O covers a litany of exposures that board members and executives of a company may face, including claims from:
- Shareholders, Investors, Partners, & Members: Merger/acquisitions, financial performance, stock or other offerings, conflict of interest, bankruptcy and financial reporting;
- Customer, Clients and Consumer Groups: Refusal of credit, extension, debt collection, deceptive trade practices, contract disputes, restraint of trade, dishonesty, and cost, quality of product or services; and
- Other Third Parties, Including Competitors: Antitrust, copyright/patent infringement, business interference, competitor disputes, company defamation, tax issues and regulatory/ other government issues. (Source: E-Risk Services, LLC)
What to know before purchasing or renewing D&O insurance
It is not enough to simply know your company has D&O insurance coverage. Is there sufficient “Side A” coverage in your policy? Is there a broad definition of Claim? Is there a right to select your choice of counsel? What is required to settle a claim? How much insurance should an organization have?
Insurance brokers with dedicated D&O resources have the specialization and product expertise to secure the appropriate coverage terms and conditions at the best available rates. These dedicated resources help determine the proper amount of coverage based on a variety factors and providing peer group data.
Consider selecting an insurance broker with the skill and market knowledge that goes beyond the basics to help you achieve the best results in this hard insurance marketplace.
Please reach out to your M3 Account Executive to discuss how we can help.