Directors & Officers Liability Insurance Information
What is Directors & Officers Liability Insurance?
Directors and officers liability insurance covers a company’s directors and officers for claims made against them. Also known as Directors & Officers Liability Insurance, the policy protects against allegations of wrongful acts when acting as company executives. Wrongful acts may consist of misstatements, errors, breaches of duty and more.
Directors & Officers Liability Insurance is recommended for publicly traded companies with a corporate board or advisory committee. Many investors and board members may refuse involvement unless this protection is in place.
What are the benefits of Directors & Officers Liability Insurance?
Employees, stockholders and customers are able to make claims against a company and its directors. Whether grounded or frivolous, the resulting legal expenses and reputation damage can be extensive. Directors and officers can be held responsible for the acts of a company, which puts their personal assets at risk.
Directors & Officers Liability Insurance protects companies and their officers from criminal, civil and regulatory proceedings from allegations of wrongful acts.
When is the coverage triggered:
- Shareholder claim alleging breach of fiduciary duty and mismanagement against the directors and officers resulting from a decline in the asset value of the company
- Claim brought by creditors against the directors and officers of an insolvent company alleging misrepresentation
- Claim brought by shareholders alleging misrepresentation in connection with a private placement.
Why Directors and Officers of Private Companies Need D&O Insurance
1. Attracting New Directors: D&O insurance makes board seats more attractive. Individuals may be reluctant to take on director/officer roles without the protection D&O insurance can provide. This may make it more difficult for a company to find the right people to serve in key corporate positions.
2. Bankruptcy: Private companies sometimes go bankrupt. In bankruptcy, creditors can sue directors and officers. When a corporation is insolvent, only D&O insurance stands between creditor suits and the personal assets of the directors and officers.
3. IPO Considerations: If your company is considering going public, think about placing D&O insurance while still private. By doing so, you can build a relationship with public company insurers and avoid having to make any warranty statement for at least the first layer of insurance the company intends to rely on after going public.
4. Mergers & Acquisitions: If you’re considering M&A, its best to purchase D&O insurance as soon as possible (ideally before you are in discussions to be acquired.) Current Directors and officers will want to be indemnified if they are sued after the deal closes. An acquiring company may be unwilling to do this. D&O insurance can provide a helpful backstop.
5. Regulatory Exposures: Private companies are subject to government regulations. Paying the cost of an attorney to defend an officer (or director) against a government enforcement action is expensive. Depending on the circumstances, D&O insurance policies can help with these expenses.
6. Personal Assets: Directors and Officers of private companies often have a great deal of their own wealth tied up in the firm. Therefore, the cost of defending, settling, or being held liable on a claim can have financial repercussions for that executive’s spouse, family, and estate.
7. Third Party Claims: Broader coverage for directors and officers is needed today in our increasingly litigious society for third party non-employment discrimination claims, which are brought by consumers and clients for discrimination, sexual harassment, or violation of an individual’s civil rights.
8. Shareholder Lawsuits: Directors and officers are subject to claims brought by private shareholders for inadequate or inaccurate disclosure, including financial reporting and statements made in private placement materials.
9. Young Companies: Private companies, especially in their early years, may not have the resources to hire specialized support staff or outside advisors for complex legal filings and other requirements. This makes them more susceptible to legal compliance claims brought by governmental agencies, on matters such as tax law, labor law, etc.
10. Emerging Risks: Private company D&O insurance may be able to respond to newly emerging risks. For example, years ago, it would have been rare to hear anyone cite the need to defend against illegal insider trading a s a reason for private company D&O insurance. With the emergence of secondary sales platforms for private company stock, this has changed.
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