Directors and Officers Insurance for Private Companies
Most, if not all, larger publicly traded companies have insurance for their directors and officers, while some smaller companies have a misconception that it may not be necessary to provide this important protection. In many instances this could be a costly mistake, as directors and officers (D&O) liability for private companies provides for board members who may become targets of litigation.
Shareholders or investors who feel that some type of wrongdoing has occurred (and put the blame squarely on the shoulders of one of the board’s directors) often file claims. Competitors, customers, employees or even government agencies can make similar claims and the cost of defending such claims can be ruinous, especially if a claim’s judgment or settlement amount reaches into the hundreds of thousands of dollars or more.
D&O liability coverage protects directors and officers against all types of claims
It is a sound idea to add D&O to the insurance protections already in place for most businesses, for any or all of the following reasons:
- 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. With new business enterprises having a more difficult time getting off and running, if investors suddenly lose their start-up funds, they may seek recourse against the firm’s top executives in the form of a lawsuit, alleging misappropriation of funds.
- Many private companies are established believing that, over time, the business should succeed and the company can go public. If this is the case, a D&O policy can protect the founding entrepreneurs against claims by shareholders and/or investors who make claims that the sales price wasn’t up to expectations.
- Directors and officers of private companies are often active, hands-on business executives, and are very involved in their company’s business operations. Due to this fact, their actions, especially if things go sour, are more likely to be called into question.
- Employment practices liability litigation claims of sexual harassment, discrimination, and wrongful termination are all growing in number these days. These types of lawsuits can have devastating results when settlements are handed down. Hands-on management by a private firm’s key executives makes them easy targets for claims of this nature. A combined D&O/EPLI (employment practices liability insurance) policy makes sense for these firms.
The concerns are real, which is why securing directors and officers for private companies is always the right choice.