Directors and officers’ liability insurance, also known as D&O coverage, is one of the most crucial yet often misunderstood insurance types. With D&O insurance, a company’s thought leaders are protected from personal risk when they make difficult decisions that may lead to allegations of wrongdoing.
Many people assume that only publicly held companies need D&O coverage, but it should also be included in private companies’ risk management plans. Here, we will list a few reasons for a private company to consider purchasing a D&O policy.
Attracting New Board Members
Directors and officers’ insurance attracts talent to a company’s top positions. With reliable insurance for executives, a company conveys that it’s being operated and managed effectively and honestly. When a new person steps into a board position with a private company that has a D&O insurance policy, they can do so with confidence.
Meeting Requirements to Receive Venture Capital
In some cases, venture capital investment firms require companies within their portfolios to have directors and officers’ insurance. If private companies have this coverage, they’re more likely to find capitalist investors.
Protection From New Risks
D&O insurance allows privately held companies to effectively respond to the newest risks. For instance, a few years ago, it would have been unheard of for a company to say that it needed protection from allegations of insider trading. As secondary stock trading platforms have emerged, however, this type of protection has become essential. Directors’ and officers’ insurance protects companies from existing threats as well as those that may come.
Exposure to Regulatory Liability
Private companies operate under government oversight. A well-known example of this is the U.S. Department of Justice’s Foreign Corrupt Practices Act. It can be expensive to defend against government enforcement actions, but D&O insurance for private companies covers these kinds of expenses.
Bankruptcy Protection
Unfortunately, some privately held companies go bankrupt. During a bankruptcy, a creditor can sue a company’s officers and directors. When corporations are unable to pay bills, only directors and officers’ insurance prevents creditors from taking board members’ personal assets.
Merger and Acquisition Safeguards
If a company is considering a merger or an acquisition, it should purchase a D&O policy right away. Current officers and directors should be protected if they’re sued after the deal goes through, but purchasers aren’t always willing or able to extend such courtesies. Directors’ and officers’ policies indemnify executives, even if an acquirer goes bankrupt.
Claims by Shareholders
When private companies have numerous unrepresented shareholders, the risk of a lawsuit increases. This is particularly true in mergers and acquisitions and in cases where “down round” financing is necessary. A D&O policy may cover the cost of legal defense in these instances.
Initial Public Offerings
When companies consider an IPO or initial public offering, it’s best to purchase a D&O policy beforehand. Such coverage helps to create a history with public insurers, and it also keeps a company from having to make a warranty statement for the insurance it may use after the IPO.
The Right Coverage at the Right Time
Directors’ and officers’ insurance is an excellent risk reduction tool that gives executives the confidence needed to make tough decisions. With the right policy, companies can protect themselves from litigation while building a stronger and more stable financial future.