DON’T NEED D&O INSURANCE?
THINK AGAIN
M
any times, private
companies do not see the
need for Directors and
Officers insurance as it is
thought of as a coverage
meant for public companies with a board
of directors and shareholders. However,
in today’s highly litigious environment,
Directors and Officers insurance is
becoming more and more of an essential
coverage not only for public companies
but for private companies as well.
Directors and Officers (D&O) insurance
provides coverage for defense costs and
loss payments arising from wrongful act
allegations against company directors
and officers. Coverage is provided in
three parts: Side A, Side B, and Side C.
Side A covers individual directors and
officers for non-indemnifiable claims
on a first-dollar basis; Side B reimburses
the company for indemnifiable claims
to its directors and officers; and Side
C protects the company. Sides B&C
are subject to the policy’s retention or
deductible. D&O policies are normally
claims-made policies, meaning coverage
applies to claims made and reported
during the policy period and may include
a retroactive date and/or pending and
prior date which excludes wrongful acts
prior to a set date. Allegations can be
brought from any number of individuals
or organizations including investors,
customers, competitors, employees,
government regulators, and more.
An important part of what a D&O
policy can provide is the defense cost
coverage. Private company D&O policies
may include a duty-to-defend clause
where the insured would have access
to defense coverage from the insurance
carrier above any retention or deductible.
Some carriers will also allow adding an
additional defense limit on top of the
D&O aggregate limit. A payment in the
hundreds of thousands of dollars can be
catastrophic for many private businesses,
especially when those types of losses are
not budgeted for.
A 2018 Chubb Insurance Company Private
Company Risk Survey 1 found that the
average reported D&O loss was just under
$400,000, and 26% of private companies
reported experiencing a D&O loss in the
previous three years. Even with such a
high average claim cost and one-fourth of
the respondents having had a claim in the
previous three years, less than half (43%)
of the responding companies purchased
D&O insurance. Of the respondents
who did not purchase D&O insurance,
multiple reasons were offered: 33% of
respondents didn’t believe coverage was
necessary because the business was
privately held; 32% did not experience a
D&O-related claim in the past; 31% did
not think coverage was necessary because
the business was family run; 22% did not
purchase D&O insurance because they
were not contractually obligated to; and
22% believed coverage was provided by
other types of insurance, such as General
Liability.
Being privately held or family-owned
does not make a company immune to
D&O-related claims or allegations. A
company and its executives do not need
to be guilty of wrongful acts in order
to have allegations made against them.
Many times privately held companies
have multiple shareholders or investors.
Claims alleging mismanagement or
misrepresentation can be brought from
these shareholders or investors for items
like inaccurate disclosure of financials
or mismanagement of finances/the
organization. Other examples of potential
claims can be from customers for negligent
hiring or supervision of an employee, from
a competitor due to unfair trade practices,
or from a vendor or supplier for improper
inventory management.
The current COVID-19 pandemic may
also lead to D&O related wrongful act
allegations due to the rapidly changing
business landscape. Claims from
employees, shareholders, investors, and
creditors may allege breach of fiduciary
duty in planning for or responding to
the pandemic. Companies are also
moving towards working remotely and
the increased cyber exposure may lead to
cyber and D&O claims for misstatement
or mishandling of the company’s cyber
protection. COVID-19 took the world
by storm in a matter of a few months
showing how quickly things can change.
A D&O policy could be crucial at a time
like this when a large payment may have a
significant impact on a company’s well-
being.
The main reason privately held companies
should think about buying D&O insurance
is for peace of mind. A D&O policy can fill
in coverage gaps between other policies to
provide additional protection and round
out a company’s insurance program. At
the very minimum, have a broker or agent
quote D&O insurance to identify the cost
for your company. +
BY: CHASE KUROSAKI,
ACCOUNT EXECUTIVE,
ATLAS
INSURANCE
AGENCY
CONTINUE
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Chase is an Account Executive at Atlas
Insurance Agency. Prior to joining Atlas,
Chase was a Financial Analyst in the
technology sector and a Senior Analyst
at JLT Re where he assisted in placing
both treaty and facultative reinsurance
programs for client insurance companies.
Chase graduated from Santa Clara
University and has the AINS designation.
1. 2018 Chubb Report: chubb.com/us-
en/_assets/doc/2018-04.20-14-01-1270-
private-company-infobook.pdf
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