D&O Insurance: Public vs Private Company Policies
Private companies face many of the same risks as public companies; litigation from investors, derivative suits, regulatory actions, and bankruptcies, etc. The only real difference are the applicable laws and the nuances of the allegations. There are also some key differences among their D&O insurance programs as well. Generally speaking, public company D&O policies are more expensive per limit and contain higher retentions, which can easily exceed 1 Mill. The towers themselves are often a bit different. Private company D&O (and to a certain extent smaller public company D&O) insurance structures are often more straightforward with less participating carriers. Generally, there is an underlying full ABC policy, potentially with some excess coverage on top and/or excess Side A. One area private companies often fall short on however, is the inclusion of Side A DIC (difference in condition) insurance. Some private companies believe these policies are mainly intended for public companies, which is far from accurate. Underlying carriers can still become insolvent, the company may still refuse to indemnify its directors or officers, and there are always more restrictive Side A terms in the underlying policy – these are all gaps that are effectively filled by a side A DIC policy. Larger public D&O towers on the other hand are often considerably more complex, involving multiple layers of excess coverage, with multiple insurers, placed alongside foreign issued policies, all of which need to be coordinated so that they interact properly with each other. This means carefully reviewing critical policy clauses, such as; any jurisdictional/choice of law clauses, severability clauses and clauses pertaining to exhaustion of policy limits and retentions.
While the policy structures are often more straightforward for private companies, the underlying policies themselves can include a wider range of coverages. Private company D&O is often sold as a package which can include: employment practice liability, crime insurance, cyber insurance, fiduciary liability, miscellaneous professional and/or kidnap and ransom insurance, all of which can either share a single policy limit or each contain their own dedicated limits – an important distinction when setting policy limits.
The biggest difference between public and private D&O insurance however, is the degree of protection for claims brought solely against the company itself. Whereas public company policy forms limit entity coverage exclusively to “securities claims”, private D&O policies cover a wide range of claims. In fact, the entity coverage for private companies is so extensive, directors and officers insurance can often act as a “catch all” for claims not covered by other insurance. As a result of the broader entity coverage however, private D&O policies also contain a wider range of exclusions. It may seem counter-intuitive, however these exclusions are simply necessary to specify the types of claims that are not covered by the policy. Private company policies also contain a very strict “securities exclusion” – and while they may not be subject to securities claims in the more traditional sense of the word, many emerging growth companies utilize crowdfunding and exempt securities to raise funds. For this reason, it’s important that any securities exclusion is properly tailored to cover any anticipated equity/capital raises. When planning on going public, it's also important that the exclusion specifically carve back roadshow wrongful acts that may be alleged prior to any IPO. Part of the broader entity coverage provided by private D&O forms also includes broader coverage for entity-related regulatory actions. Most public company policies limit coverage to formal investigations and/or those brought against insured persons, however private company policies can often extend the definition of “claim” to include informal investigations and/or those brought against the entity as well.
While private D&O forms don’t necessarily provider broader coverage to the individual directors/officers, they can often grant coverage to more individuals. In addition to covering current, future, and prior directors and officers, coverage is also often extended to advisory board members, defacto directors, managers and even employees. This broadened definition of insured person can play a key role in protecting CISO’s of larger private companies, a topic of increased focus as they’re becoming more targeted following cyber security failures. That said, private companies should also be aware that their policies contain a very broad “insured vs insured” exclusion – this is in contrast to the narrower “entity vs insured” exclusion contained within many public company D&O policies. So while there are a wider range of covered individuals, having these parties included on the policy also means that any claims brought by those individuals will also be excluded by means of the “insured vs insured” exclusion. Accordingly corporate officers sitting on private company boards should consider whether or not they want their policies containing such broad definitions. Including such a wide range of insured persons could also have limit implications, as the policy’s limits could be shared among more insured parties.
In terms of defense costs, public company policies almost always place that duty on the insured, meaning that the insured is responsible for working with their own counsel and managing their own claim, the insurer in turn agrees to advance/reimburse those costs on a regular basis. Where there are a mix of both covered and uncovered wrongful acts, the carrier will use their best efforts to allocate coverage accordingly. Many private D&O policies on the other hand are often written on a “duty-to defend” basis, meaning the insurer (not the insured) is responsible for managing the claim. This relieves the policyholder of the burden of having to manage the claim and removes any concerns regarding financial management during the claim process, as the insured doesn’t need to be concerned with having those costs advanced/reimbursed. Additionally private company policies often contain 100% defense allocation which means, when a claim contains a blend of both covered and non-covered allegations, the insurer agrees to incur the defense costs for all of the claims.
Lastly, there are situations in which companies may straddle both private and public D&O policy forms. A private company undergoing an IPO is one such example. Conversely some public companies may optionally decide to delist or undertake a “going private” transaction. Whether it be tailing coverage, purchasing a conversion endorsement and/or ensuring retroactive coverage, each of these transactions require different approaches in order to maintain coverage continuity and maximize available insurance.