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5 reasons your private company should consider D&O insurance

5_D&OPrivate company leaders should not make the mistake in thinking they are protected from personal lawsuits simply because their company is not publicly traded. According to Chubb’s Private Company Risk Survey, 27% of private companies experienced a D&O lawsuit over the previous decade, compared to 33% of public companies. And in 2013, the cost of a lawsuit against a director or officer of a private company was an average of nearly $700,000. Despite such risks as costly lawsuits, government fines, and more, a large percentage of company leaders are not taking steps to protect themselves. So, before you write it off entirely, keep these 5 factors in mind.

  1. The threat of lawsuits
    Private companies are statistically less likely to be sued in comparison to public companies, but a few instances stand out:

      • Creditor suits. If your private company were to go bankrupt, there is a chance creditors could sue. D&O insurance would protect the personal assets of company leadership from these creditor lawsuits.

    • Shareholder suits. As shareholder numbers rise, the risk of lawsuit rises with it. A disgruntled shareholder might bring a suit against a company’s directors and officers after a “down round” of financing or if the Ds and Os fail to obtain a high enough sales price. D&O coverage would help to fund these litigation defense costs.
    • Government suits. Private companies are subject to government regulation as well as government enforcement of regulations. D&O insurance policies can help with costs for an attorney in a case against a government enforcement action, such as the Foreign Corrupt Practices Act.
  2. Considering an IPO
    A public company is highly liquid post-offering and can be an attractive target for securities suits. In fact, one in six public companies will have directors’ & officers’ litigation within the first five years post-IPO. Your risk mitigation strategy when filing for an IPO will rely heavily on the type of D&O policy you secure. It must be negotiated such that it becomes a useful tool for your company – namely as a hedge for the company’s balance sheet as well as protection for the directors’ and officers’ personal assets.
  3. Attracting new talent
    A top-notch D&O policy that protects personal assets will assist in the recruiting of new independent board members and directors. Additionally, it will convey that this private company is being managed like a serious public entity.
  4. The convenience of a packaged deal
    Private companies can bundle D&O insurance with other related lines of coverage such as employment practices liability insurance, or EPLI. These “blended policies” can be simpler and more comprehensive than piecing together separate liability policies.
  5. Exposure after company is sold
    Sellers are protected through reps and warranties coverage, but the former directors and officers of the sold-off company may continue to be exposed to liability after the fact. Consider obtaining multiyear “tail” D&O coverage as a solution.

WGA’s ExecutiveRisk Practice can help explain the importance of D&O insurance for privately held companies.  Feel free to contact us at info@wgains.com.

About the Author

Mark Stiles is an Assistant Vice President at WGA and a member of the ExecutiveRisk Practice. He works with private and nonprofit organizations to assist them and their executives with protection for their exposures to Directors’ & Officers’ Liability, Employment Practices Liability, Fiduciary Liability, Crime, Kidnap & Ransom and Extortion.

617.646.6743 | Mstiles@wgains.com | Connect with Mark on LinkedIn |

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