Private Company & Non Profit D&O (Directors & Officers)
Directors & Officers insurance is often overlooked by companies in the private sector, particularly from smaller and mid-sized companies. While non profits are generally more risk aware (due to an increase in claim frequency), their “for profit” counterparts generally operate under a belief that they are more insulated from litigation. Often this is a result of an unawareness that the courts are capable of piercing the corporate veil, able to pursue personal-accountability for corporate debts. Businesses may also operate under the false assumption that this risk is already mitigated through their general liability insurance which is false.
The potential for private company litigation is very real and D&O liability serves as the last line of defense protecting your directors/officers assets. It provides critical coverage to protect 1) the personal assets of the company's board members, 2) balance sheet protection by reimbursing the entity for claims after indemnifying its directors/officers, and 3) brand value and reputation. It is also often your only protection against regulatory actions and bankruptcy claims, and one of the few ways to afford your company some level of protection against reputational risk. Statistics compiled from Chubb and Towers Watson indicate that 27% of private companies have experienced a D&O related claim in the past 10 years (13% in the past 3 years) with an average cost of $700,000. Claims against private companies are most often asserted by:
- Employees: Employee claims asserting sexual harassment, failure to hire, wrongful termination and more. Trends include increased EEOC activity against background checks, new DOL overtime laws qualifying previously exempt employees and misuse of social media in the workplace
- Shareholders: Claims asserted by minority shareholders, class action claims, and derivative demands asserting fraud or breaching of fiduciary duties (among others)
- Investors: During crowdfunding campaigns and raises under Regulation D
- Regulators & Administrative Actions: Regulatory & Administrative investigations/proceedings and resulting fines and penalties including FCPA related actions
- Creditors: Bankruptcy & Creditor Claims
- Competitors: Alleging unfair competition, false claims such as lible/slander and false advertising (anti trust claims)
- Customers: Related to contractual disputes, harassment and discrimination, debt collection practices, advertising claims and others.
- Vendors & Suppliers: Such claims may arise from contractual disputes and disputes related to inventory management.
Considering that many of the above coverages can initially be carved out of a D&O policy (requiring negotiating & tailoring), highlights the importance of partnering with a knowledgeable broker - obtaining a strong, well aligned package will depend on their experience. Because litigation against small and mid sized companies is relatively quiet (with little media attention), there is often a large gap between a company’s perceived risk and their actual risk. It is important to understand how a D&O program works in order appreciate its value. D&O programs contain numerous coverage parts including EPLI (employment practice liability), Crime and Fiduciary Liability – for organizations already placing/considering one (or some) of these coverages, it is often cost advantageous to package them under a D&O policy to afford an additional layer of protection for the board-members. In addition to the protection provided by the insurance itself, companies are also often prompted to place D&O insurance coverage due to:
- Launching a crowdfunding campaign or raising equity under regulation D
- Concerns over the company's financial stability and the need for strong balance sheet protection
- Seeking to attract (or retain) more qualified directors and executives
- A change in regulatory climate such as new regulations or increased scrutiny
- Term sheet requirements when approaching venture capital or private equity firms
- Financing requirements when approaching creditors
- Future planned IPO's and/or M&A (mergers & acquisitions)
Professional & management liability insurance is complex and challenging - partnering with an experienced broker is critical. As a relationship driven boutique agency focusing on D&O, GB&A is particularly well aligned to meet the liability needs of (larger) small businesses, mid sized companies and non profits. While our passion for executive liability helps us address current trends/issues to provide value insight - our deep knowledge helps us apply that passion for the benefit of the companies we advise. Services include program/coverage audits, gap analysis and benchmarking when required. For companies currently performing policy assessments/comparisons we recently published a private company D&O checklist.