As a privately held firm, one of the most important coverages that needs attention is Directors and Officers Liability.
Is your privately-owned company, and board members, covered by Directors and Officers liability insurance? However small the business might be, size will not matter when someone comes after its top leadership over a legal or financial dispute. Different types of people or parties, from a disgruntled employee, shareholder, regulatory agency, creditors to customers can sue your company directors.
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Factors Why a Private Company Should Purchase Directors and Officers Liability Insurance
We often get questions on why a private firm should purchase Directors and Officers Liability insurance. Here are the circumstances under which the D&O liability coverage can help a private business:
Winning New Directors Over – You’ve identified talented directors that you are confident can steer your company’s growth agenda in the right direction. But there’s one problem—the potential business leaders you’re talking to need assurances that they wouldn’t suffer financial or legal consequences if somebody sued them for something they did (or did not do) while fulfilling their obligations to your company. You can win their hearts over by protecting them with D&O insurance.
Regulatory Risks – What if your company directors ended up in court for allegedly violating a relevant federal law, for example, a securities regulation? In a dynamic regulatory environment, companies want to be ready to deal with any changes that might impact the legality of their business practices. If these directors are at fault due to non-compliance, you want them covered by D&O insurance against potential liabilities. Equally important, defending oneself against federal authorities is usually a costly affair. But the right insurance policy can take care of the necessary legal fees if the government takes your company officers to court.
Insolvency – Many a times creditors or even trustees have come after the personal assets of directors and officers of companies that have become insolvent. That is usually an option when the business in question has no other assets that claimants can attach. D&O insurance can cover these officers against financial losses resulting from such actions.
Mergers and Acquisitions – Mergers and acquisitions always go hand in hand with acquired liabilities and rights. For example, a company acquired through the stock exchange may owe employees or contractors an amount of money. Or there could be an overlooked outstanding bank loan in the company’s records. The new buyer might not readily assume the previous owner’s pre-sale liabilities. But current directors and officers will need security against liability in case an interested party sues them after the M&A. D&O insurance can provide the necessary safety net.
Shareholder Lawsuits – As a privately-owned company grows, there is never telling when an unhappy shareholder might bring a lawsuit against its directors. It could be that a disgruntled owner thinks that officers are not exercising due care when handling company assets, or directors are acting in ways that hurt the company’s financial position. Such claims may not always be accurate, but the directors and officers need insurance protection in case shareholders sued them. A D&O policy can provide them with the security guarantee they seek.
Venture Capital Expectations – Investors or investment banks appreciate the potential in your startup, and they want to demonstrate faith in it by injecting some venture capital. Not having D&O insurance could put many of the otherwise upbeat investors off. Therefore, consider protecting your company directors and officers with the right policy to attract the financial backup required to take your business concept to the next success level.
In a Nutshell – The financial and legal risks that privately-owned companies encounter from time to time make it essential for them to strategize and protect their key decision makers. Usually, any unprotected top brass or company leadership will bear the brunt of their own deliberate or unintentional actions if they are sued in court. How can you protect them as the founder or CEO of your business?
Author, Julie Davis, Director of Commercial Insurance at HRO Resources – Julie is passionate about helping firms grow in a smart, sustainable way so they have the best opportunity for success. Over 10 years of C-Suite corporate insurance and risk management, providing corporate insurance and risk management services. Her career includes senior executive roles at global insurance and risk management firms. Experience building insurance and risk management strategies for innovation firms and complex risks for a wide range of industries.