Here’s Why Your Private Company Needs D&O Liability Insurance

If you run a small, privately held company, you may not think that you need the kind of insurance protection that larger, publicly traded companies have for their directors and officers. You would be mistaken. Directors and officers (D&O) liability insurance has a place in the insurance portfolio of just about any company.

D&O insurance is designed to cover claims based on the actions of a company’s directors and officers in their corporate capacity. Claims can be filed by shareholders/investors, competitors, customers, employees or government agencies. The cost of defending such claims can run high, and if a claim proceeds to judgment or settlement, the outcome can be financially crippling to a company.

Consider these “Top Ten” reasons for adding D&O liability coverage to the insurance protections you already have in place for your business:

1.   While private businesses may not trade company shares on a public exchange, they do have investors, who expect to turn a profit on the money they have invested. Today’s credit market makes it more difficult for deals to succeed, meaning that new business enterprises have a harder time getting off the ground. If investors lose their seed money, they may seek recourse against the fledgling firm’s top executives.

2.   Many private companies are established with the hope that someday, down the road, the business can go public. If and when that deal does happen, D&O can protect the founding entrepreneurs against claims by shareholders/investors that the sales price wasn’t good enough.

3.   Г‚ In private companies, directors and officers often are active, hands-on business executives. Because they are very involved in their company’s business operations, their actions are more likely to be called into question.

4.   Employment practices liability litigation claims of sexual harassment, discrimination, wrongful termination are growing in number. These types of lawsuits can result in staggering judgments and settlements. Hands-on management by a private firm’s key executives makes them easy targets for these types of claims. Combination D&O/EPLI (employment practices liability insurance) policies make sense for these firms.

5.   Private companies, especially in their early years, may not have the resources to hire specialized support staff or outside advisors for complex legal filings and other requirements. This makes them more susceptible to legal compliance claims brought by governmental agencies, on matters such as tax law, labor law, etc.

6.   Even when claims of wrongdoing, negligence or mismanagement are unfounded, they still need to be defended. Legal defense costs can quickly add up, straining the resources of a private firm.

7.   Directors and officers of private companies often have a great deal of their own wealth tied up in the firm. Therefore, the cost of defending, settling, or being held liable on a claim can have financial repercussions for that executive’s spouse, family and estate.

8.   D&O policies are best designed when they insure both the company, and individual directors and officers. That’s because there may be situations where the company cannot, or will not, indemnify the individually named directors/officers in a lawsuit. A company may not have the financial resources to back up the executive’s loss, or the corporate bylaws or public policy may prohibit it.

9.   The current insurance market has made D&O coverage more affordable than it has been in the past.

10.   Individuals may be reluctant to take on director/officer roles without the protection D&O insurance can provide. This may make it more difficult for a company to find the right people to serve in key corporate positions.

The right D&O coverage like any insurance protection you purchase for your company gives managing executives peace of mind, and the time to attend to running the core operations of their company which is, after all, why they went into business in the first place.