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D&O Considerations for Privately Held Businesses

D&O Considerations for Privately Held BusinessesSome small and mid-sized businesses may believe that Directors & Officers (D&O) Liability insurance is meant only for publicly traded firms or large companies. But this is far from the truth. Although privately held firms are not vulnerable to the exposure of securities calls actions, these businesses can still be sued, with executives being held accountable for their actions over the management of company affairs. It’s also important to note that a General Liability policy will not respond to D&O exposures, which is why a separate policy is required.

D&O Liability insurance protects corporate directors and officers in the event of a lawsuit against them by investors, employees, vendors, competitors, and customers, among other parties. A D&O insurance policy is designed to protect directors and officers by covering legal fees, settlements, and other costs; in addition, the coverage can be designed to extend to protect the company if it is named in a suit, as well. Common lawsuits include allegations involving misuse of company funds, misrepresentation of company assets, fraud, and failure to comply with workplace laws, among other issues.

In fact, bankruptcy is one of the leading causes of loss for a business and one of the leading causes of D&O lawsuits. A bankruptcy can spark litigation against directors and officers from creditors, lenders, customers, as well as investors. Even if a company doesn’t go bankrupt and simply needs to downsize, employee layoffs may still prompt claims personally targeting directors and officers, in addition to the business, alleging discrimination.

When looking to provide D&O coverage, insurance companies will evaluate different aspects of the business, including the type of business, the company’s profit, whether it has had prior claims, and the amount of debt. Insurance carriers will also want to see that your company has effectively communicated its policies to employees.

D&O insurance can be designed in parts:

  • Side A: Covers directors, officers, and employees for defense costs, settlement fees, or judgments in the event that the company or non-profit cannot indemnify them, such as if the company has declared bankruptcy.
  • Side B:  Covers the company or organization for directors’, officers’, and employees’ losses when it does indemnify them.
  • Side C: Known as “entity coverage”, this covers the corporation in its own right.

Some of the issues small- to mid-size companies should consider when shopping for D&O insurance include the following:

  • Should you limit coverage to directors and officers or include coverage for the entity, as well?
  • Make sure the policy will cover innocent directors if one member is found guilty of wrongdoing.
  • Is additional coverage needed, typically sold in increments of $1 million of coverage?
  • Examine the fine print to ensure that the policy covers a wide range of claims – from regulatory actions to criminal investigations to employee lawsuits – and to understand how coverage is triggered in the event of a claim.

Axis Insurance Services specializes in providing all types of firms, large and small, with tailored D&O Liability insurance. We can discuss your specific exposures and present you with a sound solution that addresses your needs. Our professionals will also review how the policy works, who and what is covered, among other important factors. Give us a call at (877) 787-5258.

 

 

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Blogged on: November 23, 2015 by Mike Smith
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