If you’re an owner, director, or officer of a private company – regardless of its size – you might wonder whether supplementing your firm’s General Liability insurance with Directors and Officers (D&O) Liability insurance is a wise investment.

In a word: yes. Just like large public corporations, private companies are exposed to a large number of risks, including lawsuits by customers, competitors, vendors, regulators, partners, or shareholders. However, unlike large public corporations, the leaders of small private companies are usually highly involved in all facets of their company’s operation, making them more vulnerable as individuals to legal action.

Running a company can be risky business! Let us be your safety sentinel by sharing these insights about D&O coverage.

In today’s rapidly changing, increasingly complex world, technology, regulations, shifting demographics, changing social and cultural norms, and economic cycles can trigger unanticipated risks.

D&O insurance is designed to protect the directors, officers, and employees of private companies against a wide array of claims, including:

Among the most common types of claims against private companies are employment-related risks, such as harassment, discrimination, wrongful termination, failure to pay appropriate overtime wages, or improperly classifying workers as independent contractors.

The types of lawsuits brought by customers include those stemming from contractual disputes, debt collection, the cost or quality of products or services, false claims, refusal to extend credit, and customer discrimination. In the Internet marketplace, the Federal Trade Commission has become a vigilant watchdog of how companies represent their products and services online, how they’re endorsed or recommended, and by whom.

These often include allegations of anti-trust or unfair competition, price fixing, misrepresentation of products, trade infringement, inducing customers to breach existing contracts with competitors, and enticing employees to leave one company for another. These suits sometimes involve complex areas of the law and can be expensive to defend.

The Foreign Corrupt Practices Act – which prohibits payments to foreign officials to obtain or retain business – wasn’t even on the radar screen of most private companies a few years ago. As the Internet enabled companies of every size and description to expand across borders, it’s an exposure many cannot afford to ignore.

Legislation like the Jumpstart Our Business Startups (JOBS) Act can result in increased exposure to litigation for some private companies. Intended to stimulate growth by making it easier for companies to raise money (through means like crowdfunding), it has blurred some distinctions between public and private companies, potentially resulting in heightened exposure to lawsuits.

Shareholder complaints comprise the second largest category of lawsuit brought against private company directors and officers. Common allegations include actions that benefit majority shareholders at the expense of minority shareholders, inadequate or inaccurate business disclosures, and challenges to mergers and acquisitions.

During tough economic times, creditors may call into question the accuracy of the financial information they received before extending credit. Creditors can also sue for “breach of fiduciary duty” if they feel directors have allowed a company’s assets to be squandered. While bankruptcy can spark lawsuits, economic growth can also lead to lawsuits or regulatory enforcement as companies are lured into acting hastily or overreaching for new opportunities.

Conventional D&O insurance is often referred to as “A-B-C coverage.”

  • “Side-A” provides legal defense or loss
    coverage directly to directors and o cers
    only. Exclusions can apply if a bankruptcy
    court issues an order preventing such
  • “Side-B” provides that coverage reimburses
    the company when it pays lawsuit damages
    or settlements on behalf of directors and
  • “Side-C” provides coverage to the company
    itself for claims brought against it.

In A-B-C coverage, directors and officers share the policy limit with the company – which means the settlement of a claim against a company can leave the directors and officers without coverage.

Depending on the specific terms and conditions of a policy, D&O will not only provide damage settlements, but also cover defense (and, sometimes, investigation) costs, which often can exceed the cost of settlements. Exposures not covered might be available for an additional premium. In other cases, especially those involving regulatory violations, protection might be prohibited as a matter of public policy.

Since D&O policies can vary, it’s important to make sure your coverage is appropriate for the exposures you may face.