Directors and officers of private and public companies face increased scrutiny by regulators, shareholders, and plaintiffs. The volume of lawsuits and investigations continues to rise. A directors’ and officers’ (D&O) insurance program provides an invaluable means to cover the ever-increasing costs incurred by companies to combat such actions.
Most public companies consider the need to procure D&O insurance coverage a given—the reality of an increased number of derivative, securities, and fiduciary lawsuits. Private companies however, have been more reluctant to acknowledge and protect against a risk they feel is unlikely to present itself. As a result, private companies do not universally procure D&O insurance. This business decision may in fact be a mistake.
According to a 2016 Chubb report, private companies that have experienced D&O losses reported an average reported loss of $387,000 and a maximum reported loss of $17 million.
Of the private companies that experienced a D&O loss, 96 percent suffered a financial loss, 42 percent incurred a loss of productivity or man-hours, 36 percent faced a negative impact to morale/company culture, and 31 percent suffered a negative impact to their brand or reputation or both. The top reasons a private company did not purchase D&O insurance include the following: 33 percent believed D&O coverage was not necessary because their business is privately held, 33 percent had no historical experience with such claims and therefore did not purchase D&O insurance, and 30 percent believed coverage was not necessary because their business is family run. Private companies’ justification for failing to purchase D&O coverage is misguided.
Private company D&O coverage is broader than public company coverage and often covers many of the concerns or risks private companies face, including claims by investors, competitors, customers, employees, or government agencies, and D&O insurance may provide protection against such losses. Companies, both public and private, must identify potential liability risks and determine what insurance policy may meet the general needs of their business.