Most public companies understand the need for directors and officers (D&O) insurance. However, managers of some private companies, particularly those at very closely held companies, often falsely believe they are unlikely to ever face a lawsuit. The truth of the matter is that private companies are sued quite often, sometimes for those events that are outside the scope of coverage of the general liability, employment-related practices liability, or any fiduciary liability policies on hand.
Many executives having survived a claim know far too well the risks involved, but unfortunately many company officials learn the hard way when they finally recognize their need for coverage of this type when it’s already too late.
Those that resist the need for D&O insurance are affiliated with companies that have few shareholders; hence they look at their ownership and conclude their company is not likely to have a D&O claim. This, despite the fact that the array of prospective D&O claimants is broad and includes many people the company comes into contact with daily, including customers, vendors, competitors, suppliers, regulators, creditors and others.
The cost of defending a claim can be extremely high
When a company has a claim, expenses can mount quickly. Even a frivolous lawsuit can be expensive to defend, while the cost of private company D&O insurance is generally quite low by comparison.
D&O policy written on a “duty to defend” basis
This is much broader than the duty to indemnify because, under the duty to defend coverage, the carrier appoints defense counsel and takes care of managing the claim. The policyholder doesn’t have to deal with legal bills and so on. Another advantage of duty to defend coverage is that, in most cases, if any part of the claim is covered, the insurer must defend the entire claim, even those parts that are not covered.
Without the valuable coverage of directors and officers insurance, many companies would actually go bankrupt just from the associated legal costs, even if the suit were groundless. Also, the time that is consumed in preparation and defense of a D&O lawsuit can be quite costly, in terms of lost production, lost opportunity costs and dissatisfied customers.