Most executives consider directors and officers liability insurance a necessity for public companies, but privately held companies that overlook this coverage may not realize they are leaving themselves vulnerable. Philip K. Glick, senior vice president with ECBM Insurance Brokers and Consultants, says that a majority of private companies don’t think they need D&O coverage and are therefore reluctant to purchase it.
“They don’t think they need it because they are not worried about shareholder lawsuits,” Glick says.
However, this coverage can benefit not only directors and officers of public companies but those at private companies, as well.
Smart Business spoke with Glick about how D&O insurance can help protect private companies and how to avoid common coverage gaps.
Why do directors and officers of private companies need D&O insurance?
If you’re a private company and don’t have public shareholders, you can still benefit from D&O liability insurance. Only about 40 percent of claims covered by D&O policies are related to shareholder lawsuits against public companies; 60 percent are from other parties.
You could be sued by a customer, a vendor, a banker or other creditor, competitors, government agencies, or regulators. Those lawsuits comprise the 60 percent of claims not brought by shareholders and can be covered by a D&O policy. That’s why the coverage is critical for private companies and nonprofits.
What exposures can D&O insurance protect against?
Standard D&O policies cover lawsuits. If a competitor sues you for tortious interference of contract or unfair competition, D&O covers that. This is a ‘you stole my customer’ situation. I had a deal with someone, but you got a copy of my proposal, bid against me and took the client. Or if a customer sues for misrepresentation of services, D&O can cover that. If a lender sues, saying you misrepresented financial statements and it lent you money it shouldn’t have, D&O can also cover that. It has a much broader application than people think.
What is not covered by a standard D&O policy?
Mediation and arbitration actions are normally not automatically covered. You need to add those. Also, if someone says you’ve committed a criminal act or they say you’re infringing on their business and demand an injunction, the standard policy does not cover that. But you can add coverage for defense fees arising from the filing of criminal allegations and demands for injunctive and other nonmonetary relief. You can also buy coverage for regulatory and administrative acts. For example, no one has sued you, but an administrative agency is investigating you; insurance will cover the defense costs of the investigation.
