
Deepak Adappa
Managing Director, FINPRO
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United States
In today’s complex business landscape, organizations face a series of evolving and emerging risks that can impact their risk profile and potentially expose their directors and officers to significant liabilities. Without the proper insurance coverage, the personal assets of a private company’s leadership may be in danger.
Despite the potential challenges, many private companies may underestimate the exposure to their leadership teams due, in part, to the belief that disgruntled shareholders represent the only significant source of liability to a director or officer. As a result, private companies may not purchase directors’ and officers’ (D&O) liability insurance.
However, shareholder lawsuits represent only a portion of all reported lawsuits brought against directors and officers. Many other types of D&O lawsuits are brought by other parties, including employees, customers, creditors, vendors, competitors, and regulators. These legal risks exist regardless of the number of shareholders or whether the company is private or public.
In an increasingly litigious environment, where stakeholders, employees, and regulatory bodies may pursue legal action for a range of issues — from financial mismanagement to breaches of fiduciary duty — directors and officers insurance serves as a safeguard against potential financial losses.
Many exposures present potential liabilities to the personal assets of directors and officers of privately held companies, and this extends to the personal assets of their spouses and estates. These include:
A well-structured D&O program provides essential liability protection for the personal assets of directors and officers in the event they are sued for alleged wrongful acts while managing the company.
Additionally, having D&O coverage can enhance a company's ability to attract and retain top executive talent, as it demonstrates a commitment to protecting leadership from personal liability.
The applicable legal standards of conduct for directors and officers of privately held companies are identical to those of publicly held corporations. All directors and officers are subject to three basic duties in performing their responsibilities:
Purported breaches of these duties can lead to claims against directors or officers of privately held companies and non-profit organizations.
Though a company’s by-laws usually provide some type of indemnification to its directors and officers, there are many situations where corporations are unable (or unwilling) to provide such indemnification. Examples include:
These scenarios underscore the importance of a robust D&O insurance program since this presents the only protection for an individual’s personal assets.
Private company D&O policies afford coverage to the board of directors, executive officers, and employees of a corporation for claims made against them in their capacities as such. These policies further afford coverage to the corporate entity for purported breach of duty, negligence, error, misstatement, misleading statement, or act or omission in the performance of their duties to manage the company.
Often, private company D&O policies include broad coverage for claims involving violations of employment practices laws, thus sometimes minimizing the need for a separate standalone EPL policy. Program limits and coverage provisions should be assessed on an annual basis.
It’s good to note that private company D&O policies typically provide substantially broader coverage for the entity than a public company D&O policy. A public company D&O policy generally only provides entity coverage for securities claims; on the other hand a private company D&O policy provides broad entity cover for all claims brought against the company. The entity coverage in a private company D&O policy is generally only limited by the exclusions in the policy.
While most private companies can face challenges that could impact their directors and officers, businesses working in specific industries may be exposed to particular risks that should be considered when developing a D&O program.
Higher education institutions face numerous challenges, including the risk of financial distress, partially due to a drop in college enrollment and higher operating costs. Higher education institutions with hospitals carry the same exposures as a standalone health system, such as anti-trust, D&O, and EPL claims brought by doctors, to name a few.
Financial distress often brings negative repercussions to private companies, in the same way it would to public companies. These businesses may face claims of misrepresentation or breach of fiduciary duty brought by secured creditors (lenders, banks, financers, and board-represented equity holders) and unsecured creditors (vendors and equity holders with no board representation) against the company, its board, and its officers.
Managing Director, FINPRO
United States
Private Company D&O Product Leader, FINPRO
United States