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Research: Many Private Companies Not Insuring Against D&O Risks


Research Many Private Companies Not Insuring Against D&O RisksOnly 28% of Smaller Private Firms Purchase Directors & Officers Liability

A recently released report, “The Private Eye: Spotlight on the U.S. Private D&O Market”, indicates that private companies have a perceived lack of litigation risk when it comes to their directors and officers. According to Advisen Ltd, which provides insight into underwriting, marketing and purchasing commercial insurance, only 28% of firms with annual revenues below $100 million buy Directors and Officers Liability (D&O) insurance, compared to an average of 60% of those firms with revenues above $100 million that purchase the coverage.

Part of the reason for firms going without coverage could be the need for additional education regarding policy pricing but equally as important is the fact that these companies don’t perceive the need for it. In fact, almost half of privately held firms that don’t purchase D&O coverage are not “overly concerned about lawsuits”, according to Advisen, which surveyed more than 260 U.S.-based private company executives.

This, of course, flies in the face of what is going on in the D&O landscape. You have agencies such as the National Labor Relations Board and the Federal Trade Commission that have stepped up their enforcement efforts. You have the Department of Justice (DOJ) that has taken a proactive stance regarding the Foreign Corrupt Practices Act (FCPA). In 2010, for instance, there were forty-eight DOJ actions involving the FCPA, compared with just two in 2004. The FCPA was enacted in 1977 to criminalize bribery of foreign officials by U.S. companies; and to promote fair business practices, integrity, and accountability among U.S. companies and individuals doing business in foreign markets. Any company that has significant operations in the U.S. falls under the FCPA, regardless of whether a corrupt act takes place in or outside the country.

Today, increasingly more private companies are taking advantage of opportunities in emerging markets abroad and conducting business overseas. And, although private-company leaders are aware of corruption as a key risk in those markets, there is also the risk of a company unwittingly engaging in what the FCPA deems corrupt practices — via routine procedures employees thought were permissible or through indirect violations. Company management, therefore, needs to review the FCPA provisions carefully, making sure their employees and business associates are fully aware of all the fine points, especially since the CEO, CFO, and other executive officers may end up being responsible for corrupt actions taken by third parties on the company’s behalf. With the DOJ’s focus on individual accountability, corporate executives are now at risk for business procedures that, until recently, they might have considered routine rubberstamping, such as securing government permits, processing customs papers, and procuring sales licenses.

In addition to having robust FCPA compliance in place, private companies should also look into securing D&O coverage. D&O insurance, depending on the type of policy and the supplemental coverages available, can be designed to provide coverage for costs arising from formal proceedings and investigations (up to certain amount) brought against individual executives for FCPA violations, as well as derivative civil lawsuits filed by investors or other stakeholders.

Additional risks

Directors and officers of private companies also share many of the same management liability exposures – and are held to the same standards – as their public company counterparts. What’s more, activities involving mergers and acquisitions, IPOs and bankruptcies put private company and their directors and officers at risk. For example, during an IPO, the exposure to private company directors and officers can result from its disclosures (or lack thereof) to potential investors in registration materials and solicitation documents, or in a “roadshow” where senior managers make representations about the company to potential investors and analysts. Lawsuits typically are brought after the company fails to perform up to expectations in which shareholders may claim that management did not disclose critical, material information.

As you can see, there are many reasons (and we’ve just touched the surface here) why private companies of all sizes need D&O insurance. Depending on the policy, in general you can obtain coverage to: protect the personal assets of directors and officers from liabilities that are “not indemnified” by the corporation; provide insurance to the corporation when the corporation is required, in accordance with its articles of incorporation, by-laws or other agreement, to indemnify its directors and officers for claims made against them; and have protection for the company itself when it is listed as a defendant in a claim.

As professional liability experts, Axis Insurance Services, LLC can review with you in detail the coverage available in a Directors & Officers policy, explain the forms available and what will make most sense for your company or entity. Just give us a call at (877) 787-5258.

Sources: Advisen, PwC, Zurich, DOJ

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Blogged on: October 7, 2013 by Mike Smith
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