D&O or Directors & Officers Liability Insurance for PE Portcos is critical for most mid-market private firms. In this article, I will discuss the unique attributes and considerations of D&O insurance for portfolio companies that private equity firms own.
What Does D&O Insurance Cover?
D&O Insurance protects the leaders of a privately owned company from claims that can arise alleging any number of “wrongful acts” in managing the company.
Lawsuits may come from investors, competitors, employees, regulators, and others and often name the firm’s decision-makers personally for their acts, putting your directors, executives, and other leaders’ personal assets at risk.
Unique Elements for Private Equity Firms
For private equity firms, three unique elements of D&O Insurance for PE Portcos need to be clarified:
- Board Representation: The PE firm will have one or more of its partners or employees on its portfolio firm’s board, so ensuring they are adequately protected for their actions is essential.
- Investment Protection: The PE firm also wants to protect its investment in the portfolio company’s balance sheet. While the primary point of D&O is to protect the individual leaders, it also protects the entity, thereby providing peace of mind to their sponsor.
- Recruitment Assurance: D&O insurance provides peace of mind to any talented individuals you want to recruit to the portfolio company’s board. Often, independent directors will not sit on a portfolio’s board unless they have sufficient D&O insurance.
Why Should Sponsors Be Involved in D&O Insurance for PE Portcos?
From the sponsor’s perspective, involvement in your investee companies’ D&O insurance is crucial. You don’t want to leave it up to chance and find out too late that your portfolio company has no D&O coverage or inappropriate protection.
There’s too much risk for you, your partners, and your investments. Your first line of defense is solid protection at the portfolio level.
How to Purchase D&O Insurance for PE Portcos as a Sponsor
Several years ago, Master Insurance Programs were popular. Under a master program, the PE firm would negotiate a single policy to protect all the investee companies. However, this option is less popular today for several reasons:
- One portfolio company may be more difficult or expensive to insure than others in the portfolio.
- Allocation of premium costs is challenging.
- Aggregating isn’t always cost-effective.
- CFOs at the portfolio company level often feel they can “do better” independently.
- The addition and subtraction of firms during the hold life cycle is disruptive.
Now, a more popular idea is to work with a single broker and possibly one insurer to insure all the portfolio companies on separate policies but with preferential pricing and a standard broadening endorsement.
This method gives each portfolio:
- Their own policy
- Their own limits
- Their own discounted premiums
Managing Diverse Portfolios
Working with one broker who can negotiate with multiple insurers becomes more effective when a portfolio includes diverse companies with divergent underwriting characteristics. This approach allows each insurer to provide a standardized broadening endorsement and preferential pricing for each portfolio company.
Solutions for Smaller PE Firms
Smaller PE firms that don’t exert as much control over their investee companies might find it practical to work with a skilled broker, like The Coyle Group, as a “preferred provider” to their portfolio companies to provide them with one-off solutions that fit their needs.
Other Insurance Considerations for PE Portcos
Beyond D&O insurance for PE Portcos, consistency in business insurance coverage is critical to protecting private equity investee companies. This will include properly arranged cyber insurance, crime insurance, employment practice coverage, and package lines of coverage for property, liability, workers comp, auto insurance, etc.
A high-level, consistent approach to all lines of coverage will help minimize and prevent surprises when something goes wrong and an insurance claim must be filed. Deploying a skilled broker like The Coyle Group will give you confidence that your investments are adequately protected.
Conclusion
Arranging solid D&O insurance for PE portcos is critically essential. If you’re looking for a partner who can give you the personal attention you deserve and the expertise to create a program or provide one-off policies and advice, we’re here to help support you and your portfolio.
Give me a call or drop me an email – I’d love to hear from you and see how we can help. Thanks!
Gordon Coyle is The Coyle Group’s CEO and a seasoned business insurance expert with over 40 years of experience and four professional designations. He specializes in helping businesses with 25 to 1,000 employees navigate the complexities of risk and insurance, from cyber insurance to D&O protection and everything in between. Gordon is passionate about providing tailored solutions that protect businesses, their owners, and their futures.
Need guidance on your business insurance? Contact Gordon for help!