Why Private Companies Need D&O Insurance
Directors and officers (D&O) insurance provides corporate directors and officers with coverage for managerial decisions that negatively impact the company. This insurance may generally cover legal fees, settlements, and other costs related to their defense. All types of businesses should seriously consider D&O insurance, but there’s a common misconception that private companies may not need to purchase this type of coverage. However, even small companies with no formal board of directors or shareholders can have D&O exposures. In fact, more than 25% of private companies reported a D&O loss over the span of three years, with 96% being negatively impacted financially, according to a study by insurance company Chubb.
D&O claims against private companies can be severe and result in costly litigation. A D&O policy can be used to:
- Protect the personal assets of D&Os and those of their spouses and estates
- Protect the income statement and balance sheet of the company
- Attract and retain qualified outside directors Establish a relationship with an insurer before a potential initial public offering
- Avoid diverting management attention to protracted and costly litigation
Common D&O claims include breaches of fiduciary duty, failure to comply with regulations, a lack of corporate governance, creditor claims and reporting errors. These can be brought forth by various parties, including:
- Customers, clients and consumer groups—Common claims include harassment, discrimination, civil rights violations, contract disputes, misleading statements and false advertising.
- Competitors, suppliers and other contractors—Antitrust violations; unfair competition resulting in lost business by a competitor; and the infringement of patents, trademarks and trade secrets can all result in D&O liability.
- Other third parties—Claims, including environmental contamination to employee health and safety, can lead to investigations from regulatory agencies, such as the Securities and Exchange Commission.
- Shareholders or lenders—Alleged misrepresentation and inadequate or inaccurate disclosure in financial reporting can bring forth claims by private shareholders, bondholders and other investors or lenders.
- Employees—Harassment, discrimination and wrongful termination claims could be brought against D&Os. These claims can be covered by adding an employment practices liability policy endorsement to the D&O policy.
- Mergers and acquisitions—Potential claims include alleged financial misstatements, failure to perform appropriate due diligence when making an acquisition or bankruptcy from a failed transaction.