Unlike public companies, many private firms forgo protecting against executive liability risks despite the frequency and severity of lawsuits that have occurred. Many private companies mistakenly believe most lawsuits or fines that make headline news are brought against public companies. Others haven’t experienced a loss in the past so they don’t believe Directors & Officers (D&O) insurance is necessary. Many family owned businesses also believe coverage is not needed while other mistakenly assume claims will be covered under a different policy (CGL).
Yet for private companies, suits from customers, vendors/suppliers, employees and other third parties most prevalently lead to losses. In fact, according to a 2016 survey by a leading insurer, more than one in four private companies reported experiencing a D&O loss during the previous three years. These losses impacted private companies of all sizes and industries, ranging from healthcare organizations, to manufacturers, to retailers and more. Additionally, when a non-buyer has a D&O loss, the average cost is nearly $400,000 — a sum that can turn an organization’s balance sheet upside down. In addition to the financial loss a lawsuit brings, there is also loss of productivity, the negative impact to morale, and potential damage to brand reputation.
Following are a few D&O claims examples against private companies to share with your insureds:
- A company recruited a top sales executive who had an employment contract with a competitor. The competitor sued the company for damages suffered as a result of losing its top sales producer on the grounds that the company interfered with the competitor’s contractual relationship with its employee. Defense expenses were in excess of $250,000 and the competitor was awarded damages of $600,000.
- Investors filed a $5 million derivative lawsuit against a private company alleging breach of fiduciary duty. The investors claimed that some of the company’s officers had personal connections to the third-party contractor hired to re-tool the company’s assembly line and hired that contractor to further their personal interests, not the interests of the company. Other officers and directors were alleged to have either knowingly colluded with one another, or at least breached their duty of care in undertaking the project without properly investigating the qualifications of the contractor. The suit settled for $1.5 million with an additional $150,000 for attorneys’ fees.
- During a press conference the president of a service company stated that the success of his company was due in large part to a competitor’s lack of customer service and inferior product. The competitor filed suit alleging that the president had negligently interfered with business relations. The jury agreed and awarded the competitor $2 million in damages. The attorneys’ fees for this case amounted to $150,000.
A D&O policy insures past, present and future directors and officers when indemnification is not available (Coverage A); reimburses the company for its indemnity obligation to its directors and officers (Coverage B); insures the corporate entity itself when named. Interestingly enough, private companies that opt for D&O coverage will often purchase other executive liability policies, including Employment Practices Liability Insurance (EPLI), Fiduciary Liability, and Cyber Liability.