May 02, 2017 Articles

Insurance 101: Private Companies Need Directors’ and Officers’ Insurance Too

Private companies have been reluctant to acknowledge and protect against a risk they feel is unlikely to present itself—a position that may be a mistake

by Joseph D. Jean and Janine M. Stanisz

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.[1]

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.[2] 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.[3] 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.

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