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How D&O Polices Protect Private Companies
According to a 2016 survey by Chubb, more than 25% of all private companies have had a D&O suit in the previous three years, costing an average $378,000 per suit. In addition to the financial loss, companies who experienced a D&O suit reported losses of productivity, negative impacts to morale, and damage to their company’s reputation. With consequences like these, it is imperative that even small-to-medium-sized private companies consider utilizing a D&O policy to protect against this threat.
D&O liability insurance is commonly thought to protect the directors and officers of public companies from claims brought by shareholders alleging the breach of duty of care that resulted in a financial loss, i.e. in the form of a drop in stock value. While this is a very important aspect of the coverage, D&O for private companies encompasses a much broader scope of coverages, and should be thought of as a management liability policy.
Modern private and non-profit D&O policies can, in addition to the directors and officer’s liability coverage, provide coverage for crime, professional liability, fiduciary liability, cyber liability and employment practices liability—though offerings vary by insurer. These policies provide asset protection, both corporate and personal, as well as pay defense costs resulting from a claim. Considering the average claim for companies who do not have this coverage is $394,0001, a loss from which many small companies could never recover, D&O insurance should be considered a necessary component of a company’s overall insurance and risk-management program.
Claims in this area arise from a wide variety of sources. Experts at Brown & Riding suggest the following areas where negligence or breach of duty of care can be alleged:
- Mergers & Acquisitions
- Stock offerings
- Financial performance and reporting
- Deceptive trade practices
- Contractual disputes
- Violation of anti-trust laws
- Copywrite and patent infringement
- Regulatory violations
- Cost and quality of product
- Business interference
The above is only a small selection of areas from which D&O claims can arise, but nonetheless illustrates that every company has some exposure to a D&O related loss. Unfortunately, many companies are reluctant to buy until they get hit with a claim, at which point it’s too late. As judgements are increasingly more frequent and severe, and litigation costs are rising sharply, it is vital for the longevity of every private business to investigate the extent of their exposure, and make an intentional decision about whether or not they will utilize the coverages provided by a D&O policy.
Private D&O liability insurance offers coverage for a broad range of management liabilities that protects the personal and corporate assets of a business. For many businesses it is a cost-effective risk transfer mechanism, and should be considered by every company, no matter how small, before it’s too late.
Lund, A. and Rodriguez, L. (2018). Selling Private Co. D&O.