By Pat Keightley, CIC
Georgetown Insurance Service, Inc.
Fairfax, VA
One of the biggest misconceptions surrounding Directors and Officers (D&O) liability insurance is that it’s only intended for public companies, and companies with an outside Board of Directors. While policies are more commonly written for such organizations, D&O insurance can be very necessary to properly protect owners and executives of closely held private companies.
Simply put, D&O is “management liability insurance” and it is the only insurance product which properly protects owner and executives from some of the unique exposures they face by owning and operating businesses. It fills the coverage gap between Commercial General Liability, Professional Liability, and Employment Practice Liability Insurance (EPLI) policies and can provide coverage for allegations not covered by any of these other policies.
Lawsuits in this area have been growing rapidly over the past several years. In 2016, a survey of private companies conducted by Chubb Insurance found that 26% of respondents reported having a D&O claim in the past three years, resulting in an average loss of $387,000. The largest loss reported was an astounding $17 million. Granted, there are some very large privately held companies in the U.S. but those numbers would shock most people, even those in the insurance industry. Only 33% of survey respondents said they’ve never had a D&O related claim in their history.
The source of D&O claims is not limited to shareholders. These claims can also include customers, vendors, suppliers, banks and other creditors, as well as federal and state governments. Negligence and mismanagement, breach of contract, negligent hiring and supervision, business interference, and fraud are just a few other potential allegations that can arise.
To help paint a better picture, let’s look at a few examples:
- Business interference: A company hired a sales person from another company. That salesperson took proprietary customer information from the previous employee and allegedly used it in his/her work for the new employer causing detriment to the previous employer.
- Negligent hiring and supervision: A home health agency hired a nurse who had a lengthy criminal record and stole funds from several patients.
- Breach of contract: A government contractor was awarded a contract that specified all individuals working on the contract must be U.S. citizens. The government sued the contractor when it was determined they hired employees who were not citizens to perform work on the contract.
The good news is D&O coverage is widely available, relatively inexpensive, and can be purchased on a standalone basis. In many cases, it can be added to an existing EPLI and/or Fiduciary Liability Policies at a reduced cost. You have a choice of sharing one limit for all these coverages (least expensive), increase the limit applicable to all coverages (more expensive), or purchase standalone limits for each (most expensive). The other piece of good news is the D&O coverage available for private companies can be even broader than what is offered for public companies.
In conclusion, some of the key takeaways to think about are:
- Coverage is widely available and can be quite affordable.
- Defense and other claims costs are typically extremely high.
- Chances of having a claim are increasing.
Have questions? Contact us to speak with a licensed insurance professional.