There is a major misconception out there that companies do not need Director’s and Officer’s (D&O) liability coverage if they are not traded publicly due to a lack of exposure; however, in reality, private companies have just as much, if not more, management liability when compared to a public company.
Directors and officers of private companies are typically involved in the daily operations of their business. Therefore, they are still vulnerable to being named in lawsuits that are filed by vendors, creditors, employees, government regulators, and more. For these reasons, D&O insurance is critical for private companies. There are a few scenarios that all private businesses should note.
The Emergence of New Risk
During the past few years, there has been a marked increase in the number of cybersecurity breaches. These impact both public and private companies. These breaches place directors and officers in vulnerable positions, as they could have lawsuits filed against them alleging a failure to protect the information of the organization.
Private companies are still subject to oversight and regulation from government authorities. It can be incredibly expensive for organizations to pay the legal fees required to defend against government regulatory watchdogs. A D&O policy can help cover the costs associated with these defenses.
Lawsuits Filed by Shareholders
Just because a company is private doesn’t mean they don’t have shareholders. Investors can become disgruntled if they believe there has been a serious mismanagement of the company’s financials. This could place directors and officers in a vulnerable position. A D&O policy can help pay for the cost of litigation.
While directors and officers do not like to think about the possibility of a company filing bankruptcy; however, some companies do go bankrupt. Creditors and customers could sue the directors and officers. A D&O policy can help protect their personal assets in the event of a lawsuit.
Mergers and Acquisitions
Finally, another scenario where a D&O policy can be helpful involves mergers and acquisitions. If one company acquires another, there is a lot of exposure in the event that the deal does not proceed as planned. A D&O can help indemnify the company against the potential of loss or bankruptcy.
Invest in a D&O Policy
These are just a few of the many reasons why private companies need to have a D&O policy. This demonstrates a higher level of responsibility that could also attract more C-suite officers to the organization.