By Drew M. Smith
Many private companies do not carry Directors and Officers Liability Insurance. However, private companies are just as vulnerable to suits as their public counterpoints, in many cases, more vulnerable.
When a suit does get filed against a group or organization, Directors and Officers could be responsible for the costs of court, litigation and settlements. In many cases, especially non-profits, the amount exceeds the General liability insurance and comes out of pocket. In one case involving a church, three separate cases were brought against the board of the church for misrepresentation of funds. The total payouts of all 3 cases were over $530,000.1
Officers of a company can include but are not limited to the CEOs, CFOs, General Counsel and others. Smaller companies often don’t buy D&O for three reasons. First, with only a few shareholders, they don’t foresee the risk associated. Second, they believe the size of the company means they have it under control. Lastly, they believe the cost is too high for the related risks.
There are many activities that could result in a claim against a Director or an Officer of a private company. Some examples may include:
- Unfair Business Practices/Non-Compete Agreements: Many issues arise when hiring a new employee. When new employees bring confidential information to a new company, claims can arise from the former employee.
- Shareholder Lawsuits: In the event of a merger, acquisition or a new venture, some shareholders may benefit more than others.
- Creditors: In the event of bankruptcy or liquidation, trustees will sue the creditor alleging mismanagement of the company seeking to recoup their losses or apportionment.
- Competitor Lawsuit: Many lawsuits result from anti-trust concerns or claims of unfair business practices. Copyright infringement and unlawful hiring practices also could result in a suit against the D&O.
- Customer Lawsuits: Contract disputes, debt collection and questions about quality of products could result in customers suing the company and by extension the CEO of the company.
- Discrimination: Public sentiment towards discrimination is changing. Employers are now held to a higher standard. Further, Court rulings concerning gender identity and race continue to create increased liability.2
Private companies need D&O. There are more than enough clients that could end up suing the company and by extension the owner of the company. This includes vendors, suppliers, other competitors and more. A D&O policy can cover some of the legal, regulatory and indemnity costs associated with a lawsuit against the company’s directors & officers.
Directors and Officers are the faces of a company and are personally at risk for the decisions they make. Regardless of size, they are at risk for their oversights of the company and its business practices. For more information about our products and services, please visit our website at www.axisins.com.
About Axis Insurance Services, LLC
Axis Insurance Services, LLC (AIS) is a licensed professional liability insurance broker located in Franklin Lakes, NJ with agents licensed nationwide. They offer access to high-quality insurance products in the areas of Errors and Omissions insurance (E&O), Directors and Officers liability insurance (D&O), Crime, Fiduciary, and Privacy/Network security coverage for today’s professional service firms. AIS works with all company types including commercial real estate firms, real estate agents and brokers, property managers, insurance agents, medical groups, practice managers, third party administrators, lawyers, accountants, architects, engineers and many others.
Axis Insurance Services LLC., is not affiliated with Axis Capital, Axis Insurance Company, its subsidiaries or affiliates in any way.