Considering Directors and Officers Coverage for Private Companies

The general purpose of D&O insurance is to cover claims based on the actions of a company's directors and officers in their corporate capacity.

For those owners that run a small, privately held company, insurance needs do not differ that greatly from those larger, publicly traded companies that also employ directors and officers. This is a common misconception. Directors and officers (D&O) liability for private companies is an insurance policy that has a place in the insurance portfolio of any company where exposures exist.

The general purpose of D&O insurance is to cover claims based on the actions of a company’s directors and officers in their corporate capacity. Anyone, from shareholders and investors, to employees or government agencies can all file claims, regardless of whether the claim is justified or not. The cost of defending such claims can run high (and if a claim proceeds to judgment or settlement, the outcome can be financially crippling).

Important reasons for adding D&O coverage to current insurance protections

  • Private companies, especially early on, may not have the resources to hire necessary specialized support staff or advisers for complex legal filings and other requirements.
  • Even when claims of wrongdoing, negligence or mismanagement are unfounded, they still require defending. Legal defense costs can put quite a strain on the resources of a private firm.
  • Directors and officers of private companies often have a great deal of their own funds tied up in the firm, and being held liable on a claim can have financial repercussions for that executive’s family and estate.
  • D&O policies are best designed when they insure the company, as well as individual directors and officers, because there may be situations where the company can’t, or won’t, indemnify the individually named directors and/or officers in a lawsuit.

A company may not have the financial resources to back up the executive’s loss, or the corporate bylaws or public policy may prohibit it. The current insurance market has made D&O coverage more affordable than it has been in the past, which makes securing it advantageous and a sound business solution.

Individuals may be reluctant to take on director/officer roles without the protection directors and officers insurance for private companies can provide. This may make it more difficult for a company interested in finding the right people to serve in those key corporate positions.

The right D&O coverage, like any insurance protection purchased by a company, gives managing executives much needed peace of mind, as well as allowing them to make better use of their time attending to more important matters, like running the core operations of their company.

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