Private Company D&O Liability

A Comprehensive Guide to Understanding Risks, Avoiding Mistakes, and Tailoring Coverage

Introduction

Running a private company, you know how fast life moves. Decisions are made at lightning speed. But what happens when those decisions lead the parties to legal trouble? It can be a nightmare scenario that no entrepreneur wants to face, especially face alone. Lawsuits alleging wrongful actions in running a company are more common than you think. These suits can come from employees, competitors, investors funds, lenders, regulators, and others. How do you protect yourself? This is where Private Company D&O Liability Insurance steps in.

What is Private Company Directors and Officers or D&O Liability Insurance?

Private Company D&O insures the Directors, Officers, and other decision-makers of privately held companies against claims which allege some form of mismanagement, also known as wrongful acts in this policy form.

Why is Directors & Officers Insurance Important for privately held firms?

This means the personal assets of directors and officers are at risk, and because these types of claims are extremely expensive to defend against and settle, insurance is a critical backstop to protect the company’s balance sheet and the leader’s personal assets.

What are the risks private company leaders face?

Common risks for private companies include lawsuits and threats from:

• Disgruntled shareholders – Discontent over management decisions or earnings or growth can lead to lawsuits from this group, challenging the actions or inactions of a company’s leadership.

• Employees – Employment-related claims alleging wrongful termination, harassment, discrimination, and other allegations can lead to serious legal challenges. Common Private Company D&O policies include Employment Practices Liability Insurance or EPLI covering this risk.

• Competitors – Tick off a competitor sufficiently enough and lawsuits can fly, when business strategies or agreements may violate antitrust laws or create unfair market advantages. Another common source of claims comes from pilfering key employees from competitors.

• Regulatory Agencies – failing to comply with laws and regulations may lead to investigations and or legal actions by government regulators.

• Creditors – A private company board facing financial difficulties may be sued by creditors for failing to act in the best interests of the company.

• Customers – Contract disputes, product issues, and service dissatisfaction can all lead to costly lawsuits.

• Bankruptcy – When a private company goes bust and files for bankruptcy, D&O insurance stands between the company’s creditors (and the bankruptcy court trustees) and your leader’s personal assets.

Here’s an important question you’ve got to answer:

If you and your directors, officers, and other leaders were sued over a dispute that alleged some form of wrongdoing, where would the money come from to protect yourselves and your personal assets?

Yes, personal assets are at risk here since most lawsuits will name your leaders personally for their actions in managing your private company.

Those are the threat and other risk management issues why D&O insurance is important, but there are some other good reasons to purchase private company D&O as well, including:

• To Attract Talent – Want talented and influential board members and advisors? D&O will likely be on their punch list before they agree to sit on your board, so having it in place BEFORE asking them to join will signal that you’re a serious company.

• VC Requirement – If you’re attracting Venture Capital to your firm, you’ll find that most VCs and lately Angel investors want to see D&O included as part of your insurance program.

• M&A Protection – If your firm is considering merger and acquisition activity, D&O is a crucial element of protecting your leaders from potential claims that can arise post-close. Having coverage in effect well prior to substantive merger discussions taking place is critical.

What’s the difference between Public Company D&O and Private Company D&O?

Here are some key points.

• Public Company D&O focuses on Securities claims, lawsuits, and regulatory investigations. Specifically, part or side C of the policy for public companies is reserved for security litigation.

• Private Company D&O on the other hand can offer broadened protection and include coverage parts for employment practice liability, fiduciary liability, and more.

• The Private Company form is more flexible and addresses a wider variety of stakeholder issues.

• Side-C in a Private Company form is known as Entity Coverage and provides protection to the company when it is sued alongside company leaders.

One note of interest.

If your company is considering a public offering in the future, it’s a good idea to purchase a private company D&O liability policy while private, then you can endorse it down the road to include protection for roadshows and other risks leading up to the offering. Once public, the private policy is canceled and a new public policy is purchased. Having prior private coverage makes it easier to procure public coverage, possibly with the same underwriter.

Common pitfalls and how to avoid them in purchasing Private Company D&O

Underestimating the Need: Many top managers of private companies assume that D&O insurance is only for publicly traded corporations. This misconception can leave them exposed to significant risks.

Incorrect Coverage Limits: Either over-insuring or under-insuring can be costly. Determining the right amount of coverage requires a balanced analysis of the potential liabilities and the company’s financial situation.

Ignoring Policy Exclusions: Not all policies are created equal. Overlooking exclusions in a policy can lead to unpleasant surprises when a claim is made.

How can you avoid pitfalls and be sure you’re getting the right coverage?

It comes down to working with an expert in directors and officers insurance. It is not advisable to try and craft this coverage online through a direct buyer who may offer fast and easy quotes. In our experience, these direct sellers are mostly “human-less” buying experiences and miss many of the key risks, issues, and threats that may be on your mind.

In addition, many direct sellers only offer a single quote – their quote, so you’re never sure you’re getting what you need or getting the “best deal” out there.

To avoid these issues it pays to work with an expert who focuses on private companies and can tailor protection to your specific needs.

Further, you want to work with an expert that has broad market access to various insurers so you’ll see multiple options and get the best-recommended offer the market has to provide.

Finally, when working with an expert, you have the opportunity to ask questions and be counseled by someone who understands your concerns.

Conclusion

As we’ve laid out, private companies do face significant threats in the D&O landscape so having protection for executives from the types of lawsuits and investigations that can arise is critical. The good news is that premiums for private company director’s insurance are competitive and affordable.

If these types of risks are on your mind, then contact us for a conversation. We promise, no hard-core selling or pressure.

Just a conversation to help you understand the risks you face and the expertise we have in D&O insurance.

We have access to a very wide cross-section of D&O insurers and we’re positive we can craft a policy tailored to your needs.

Thank you.