Why Does A Privately Held Company Need D&O Coverage
Directors or officers of privately held companies who do not insist that the company purchase D&O insurance are putting themselves, their spouses and their estates at great financial risk. D&O insurance minimizes risk to their personal assets.
Directors and officers of privately held companies owe the same duties to shareholders as do those of publicly traded companies. The fact that all of the shareholders of a privately held company are relatives or friends doesn’t solve the problem. The composition of the board can change due to the addition or deletion of seats, sale of ownership, death, divorce, or any number of unforeseen events.
The fact that directors or officers are acting on behalf of a company does not isolate them from legal action. They can be held personally liable for their acts on behalf of a company. Some experts argue that directors and officers of privately held companies are more at risk of claims than those of publicly traded companies because they have fewer resources to support them. Some of the decisions may be made without full or accurate information. Furthermore, privately held companies general have fewer resources to defend their directors and officers.
Some claims may allege a breach of the duty of care with respect to how the directors or officers handled the sale of the company or how they missed a great opportunity for the company. Other claims may allege a breach of the duty of loyalty with respect to deals the company entered into with companies owned, in whole or in part, by one or more of the directors or officers. (Coverage does not apply to insureds who obtain profit or advantage they aren’t legally entitled to.)
Directors and officers of privately held companies face claims by any party with which the company contracts or even discusses a contractual relationship, whether a competitor, customer or other contracting party. Because many contracts and other negotiations for privately held companies are handled by an officer of the company, officers are at risk for claims arising out of their contracting and negotiating duties. (Coverage does not apply to legal liability assumed by any insureds under the terms of a contract when the legal liability wouldn’t exist but for the existence of a contract.)
A variety of claims can be made by government agencies against the directors and officers. Claims may vary from those relating to environmental contamination to employee health and safety. In some industries, such as defense, a privately held company can face investigations and claims from regulatory agencies with respect to suspected or actual wrongdoing.
Directors and officers may argue that, since the company will reimburse them for any claims, they don’t needs D&O coverage. A fact commonly overlooked by many directors and officers is that certain D&O claims are not identifiable by the company. Certain shareholder derivative actions are perfect examples. In the event of a claim, D&O Liability insurance may be the only means of protecting the personal assets of directors and officers.
Another type of non-indemnifiable claim should be considered. This is the claim for which a company can indemnify the directors or offiers; but because of insolvency, it has no money to do so. The company’s involvency is not a defense to a D&O claim. Unless D&O Liability Coverage is in force, directors and officers in this case will have to pay defense and indemnity costs out of their personal assets.
Finally, there’s no good reason to expose the spouse of a director or officer to liability for which insurance is available. There are great products avaiable in which Employement Related Pracitices Coverage, Fiduciary Liability, and Crime coverages can be combines into one policy. If you would like to learn more please contact us.
- Common Allegations
- Wasting corporate assets
- Compromising competitive industry position
- Overlooking significant growth or investment opportunities
- Lowered stock value
- Typical Specific Allegations
- Failure to procure insurance
- Obtaining defective insurance
- Entering into contracts with large, uninsured risks
- Failure to stop action resulting in damage to the company
- Unwarranted dividend payments, salaries or compensations
- Failure to attend meeting of Directors or Officers
- Misuse of company funds
- Imprudent loans resulting in loss to the company
- Inefficient administration resulting in losses
- Misstatement of financial reports
- Exceeding authority granted by Charter or Bylaws
- Violation of covenants in loan agreement or indenture
- Failure to disclose promptly information relative to significant developments with respect to company
- Violation of any of the responsibilities, obligations or duties imposed upon fiduciaries by the employee retirement income security act of 1974 or amendments thereto.
- Antitrust Violations
- Breach of duty to minority stockholders
- Failure to honor employment contract
- Illegal payment to public official
- Employment related