Directors and Officers Insurance
Long an important part of the risk management program of publicly traded companies, directors and officers insurance is becoming more popular among private companies as well.
Directors and officers insurance, commonly known as D&O, is designed to protect company directors and officers against the financial and legal implications of litigation, and to protect against claims arising from actions they take within the scope of their corporate duties.
This protection is especially important because directors and officers can be sued personally for the results of their corporate decisions, potentially exposing their personal assets to litigation risk.
Private Company Risks
Although shareholders and officers of private companies may feel D&O is only needed by public companies, a growing number of private firms face allegations of misconduct related to mergers and acquisitions, regulatory violations, unfair competition (such as poaching talent from a competitor) and other acts.
Private companies can be sued, for example, by shareholders, employees, customers, suppliers, competitors and government regulators.
Litigation against private company directors and officers often involves a variety of categories including:
- Breach of fiduciary duties or contacts
- Conflicts of interest
- Disclosing false or misleading information
- Financial reporting errors
- Regulatory violations
- Misuse or disclosure of trade secrets
- Mismanagement of assets
To protect directors and officers against these risks, companies buy D&O policies to provide financial resources for the cost of defending litigation, as well as any settlements or damages that may result.
Because even a baseless suit requires time and money to defend, D&O insurance provides financial protection, as well as peace of mind, for small business owners and leaders who would rather run their business than worry about litigation.
D&O coverage can also be an important tool in recruiting and retaining directors and officers of private companies. Many talented small business leaders may be reluctant to join a company that does not offer insurance protection for their personal assets.