Some small business executives overlook, or decide against purchasing Directors and Officers (D&O) insurance, believing that this type of policy is only for publicly traded companies. Nothing could be further from the truth. Although a privately held business doesn’t risk exposure to securities class action suits, a business doesn’t necessarily have to have shareholders in order for its directors and/or officers to be sued.
Any company that has relationships with vendors or customers, or those that intend to seek venture capital funding or other financial investors all have external exposures for which small business executives can be held accountable when something goes wrong or claims of mismanagement or mishandling of pertinent matters arise.
D&O policies offer coverage not offered by other policies
In addition, some small business executives believe that their general liability or umbrella business insurance policies will cover claims involving directors and officers. This unfortunately is often not the case. The general liability or umbrella policies generally don’t respond to management liability lawsuits.
The fact is that a business of any size will usually have officers and possibly directors who can be targeted by litigants over their management of company affairs. Many insurance companies now offer small business executive liability coverage starting at $1,500 per year to protect directors and officers. That’s a small amount in order to protect against a potential six-figure settlement or larger.
Directors and officers need to be protected in the event that investors, employees, vendors, competitors, or customers, among other parties, personally sue them. This coverage protects directors and officers by covering legal fees, settlements, and other costs; in addition, the coverage sometimes can extend to protect the company if it is named in a suit as well.
New appointees generally insist that coverage be provided
When appointing directors or hiring new officers, they will often demand D&O coverage as a condition of serving (or employment) because they don’t want to put their personal assets at stake. Oftentimes outside investors, such as venture capitalists or other financiers, will require D&O policies before providing funding to a business since they often see the coverage as a way of protecting their investment.
Directors and officers are sued for a variety of reasons connected with their company positions, including misuse of company funds, misrepresentation of company assets, fraud, failure to comply with workplace laws, and lack of corporate governance among other issues. Having D&O insurance is vital to the continued existence of the entities.