Private Companies and Directors and Liability Insurance

Public companies, for the most part, understand their need to carry directors and officers (D&O) insurance in order to protect executives working for their firms and offices. Managers at some private, closely held companies hold firm to their belief that this particular coverage is not always necessary. They truly feel that they are unlikely to ever be involved in a lawsuit of this nature and forgo obtaining directors liability insurance.

The fact is that private companies are constantly being sued, and quite often for events that are outside the scope of their general liability coverage, or fiduciary liability policies. Executives that have been involved in claims of this sort know better. Unfortunately, many company officials have to learn by their mistakes and often wait until it is too late to invest in directors and liability insurance.

Some private companies underestimate the value of D&O coverage

Companies having few shareholders often resist acquiring D&O insurance simply because they look at their ownership and conclude their company isn’t likely to have a D&O exposure. But they are overlooking the fact that claimants may come in the form of several of their associations, including customers, vendors, competitors, suppliers, regulators, and creditors, along with others.

One of the main problems is that when a company has a claim expenses can mount rather quickly, and even a frivolous suit can be very expensive to defend. They also fail to realize that the cost of private company D&O insurance is relatively low.

A closer look at most D&O policies for private companies reveals that it’s usually written on a duty to defend basis. This is helpful since it is a much broader type of coverage than that of the duty to indemnify. Under the duty to defend coverage, the carrier appoints the defense counsel, as well as preparing and managing the claim.

Companies in possession of this policy don’t have to deal with a lot of bills and other legal issues. Duty to defend coverage is also written so that, if any part of the claim is covered, the insurer must defend the entire claim, making this a valuable coverage that can easily exceed the cost of the policy. Private company director and liability insurance provides broad coverage at an affordable cost, making it an important part of every private company’s risk management.