National Underwriter - November 21, 2011

D&O Liability Coverage for Private Firms: A Case of Nice, or Necessary?

BY JANET CLARK

Once unknown or misunderstood by many privately owned businesses, directors & officers’ (D&o) liability insurance has been pushed onto the radar by the recession and national headlines.

while the reasons for purchasing D&o liability coverage have become less of a mystery, the question remains: Is D&o liability insurance “nice” or “necessary”?

Too many private businesses still view it as a nicety, leaving them exposed to potentially serious risk. Yet what leaders of private companies might not realize is that nearly 74 percent of private D&o claims are tied to direct shareholder/investor suits or employment-related issues.

The important thing that agents can help clients understand is that private companies aren’t exempt from exposures–and managing them should be a top priority.

one significant exposure facing leaders in private companies is that their personal financial well-being could be on the line in the event of a lawsuit against the company, its leadership or its employees.

For example, a manufacturer relies on a raw-materials supplier. If the supplier files for bankruptcy and shuts down, the manufacturer will most likely be forced to find a new supplier—which could push back product-delivery schedules. If customers decide to take their business elsewhere and expenses for the new supplier increase internal expenses, shareholders may file suit against the board, asserting they should have known the supplier was on the verge of bankruptcy.

The suit can also assert that the board failed to find a replacement supplier, which costs the company a business loss as well as loss of dividends. Directors and officers may then need to retain counsel to defend these allegations. without the proper insurance protection, their personal assets may be the only available source to cover potential costs.

Private companies neglecting to manage D&o risks can find themselves in other equally grim scenarios. In the event a director

Number of U.S. companies that have
filed for bankruptcy or
issued warnings between
Jan. 1 and Sept. 30,
2011—an increase
of almost 20 percent,
year-over-year.
3,600

or officer is specifically targeted in a claim, the company is typically held accountable as well.

J Unfair Competition and Deceptive Trade Prac-
tices: As competition grows more fierce
across industries, more companies may find
themselves involved in
litigation—for example, as
related to patents. There
is a growing trend of
companies investigating
competitors’ patents
that might be out of
date or filed incorrectly.
Any private company
that is operating with a
patent (or pending pat-
ent) could be the target
of a lawsuit from com-
petitors, if competitors
learn that a company
is misrepresenting itself
or misusing a patent it
may not own.

In fact, 8 to 9 times out of 10, corporate entities are listed as the defendant in lawsuits brought against directors and officers, leaving the company’s assets at risk.

As private companies overlook these potential exposures, new trends in D&o liability triggers are emerging. Actions or events that historically occurred infrequently have become more ordinary for companies of all types, but are particularly dangerous for private institutions because both personal and corporate finances are at stake.

emerging liability triggers include:

Source: The Deal, LLC

J Bankruptcy: Between Jan. 1 and Sept. 30 of this year alone, more than 3,600 u.S. companies have filed for bankruptcy or issued warnings, according to The Deal LLc. That is an increase of almost 20 percent over the same time period in 2010. with bankrupt-cies on the rise, companies are more likely to either file for bankruptcy themselves or be impacted by bankrupt partners. Agents need to help their clients understand the liabilities associated with bankruptcy. If a company loses its line of credit and as a result, is unable to provide services to clients, it will not have the funds to stay afloat or pay its creditors. not only will the company be exposed to lawsuits from clients they can no longer service, litigation from creditors could also be brought.

J Talent: unemployment statistics may be bleak, but top talent remains in high demand. In the past, a company might turn its cheek if an employee was hired by a competitor, but today the scenario is often different. Agents and brokers need to make clients aware that former employers are increasingly filing suits against companies for unfair competition, deceptive trade practices and interference with economic advantage when the new employee retains clients, forms or data.

Private companies need to understand the reality of their D&o liabilities—not only that litigation or claims are possible, but that the fallout of the economy may mean the threat is growing. Agents can play a pivotal role in educating clients about their risks and providing solutions to help manage them by taking the guesswork out of whether D&o liability coverage is truly necessary. when company and personal assets are on the line, the answer should be clear. NU