Directors and Officers in private companies face risks that are very similar to what their counterparts who manage public companies do. The decisions they make in managing and leading a company may not always be received well by others, and in some cases may result in a lawsuit directed at the Directors and Officers of a company. Since these risks exist whether it’s a public or private company, Directors and Officers (D&O) Liability Insurance can be just as valuable for a private company as it is for a public company. So what does Directors and Officers Liability Insurance do? What kind of protection does it offer? D&O Liability coverage can:
- Protect the personal assets of a company’s Directors and Officers.
- Protect the company’s assets.
- Provide reimbursement to the organization to indemnify D&O’s for their losses.
- Help the Company monitor and provide defense costs associated with responding to lawsuits and investigations.
There are some very good reasons why private companies should consider D&O Liability Coverage. They include:
- The cost of defending corporate lawsuits may exceed the net worth of most private companies.
- Judgments can be financially crippling.
- Bad business decisions are likely to be more visible in a small business environment attracting the attention of shareholders, regulators or others.
- D&O’s cover more corporate duties in a demanding environment.
- Business decisions made by D&O’s can quickly affect the finances and operations of a company.
- Unique conflict of interest may exist along with adverse shareholders.
- Companies will have difficulty attracting qualified talent to their boards without D&O Coverage.
In addition, there are a number of trends that may increase the risks Directors and Officers face. These trends, and others that may arise, illustrate why D&O coverage can be valuable. Some of the trends we have seen recently are:
- Economic uncertaintity
- The growth of the Internet and trying to keep up with technology
- Greater emphasis on protecting intellectual property assets
- Access to adequate capital
- Retaining qualified workers
The following scenario shows a situation that might come up with any company. If this scenario happened, D&O coverage would protect the company and its Directors and Officers. A plaintiff filed a complaint against their competitor alleging that a former employee, now working at the competition, engaged in unauthorized use of confidential and proprietary information and committed other acts of unfair competition. As a result, the plaintiff alleges it has suffered irreparable and immediate injury. The plaintiff seeks a number of injunctions which include compensatory, exemplary and punitive damages that along with attorney fees exceed $350,000. This is just one example from a large list of sources and exposures which can come from Shareholders, Investors, Partners, Customers, Clients, consumer groups or other third parties. Bottom line, D&O Coverage shouldn’t be looked at as a “premium” or expensive, extra insurance policy that a private company doesn’t really need. Instead, it should be considered as an essential part of any organization’s Risk Management strategy.