3 Reasons to Purchase D&O Liability Insurance for Private Companies

Today’s complex and litigious environment has made Directors and Officers insurance an effective way to minimize the risks business leaders (decision makers) may face. Until a few years ago, D&O insurance was mostly reserved for large business houses having a visible number of Board of Directors. This is no longer the case as more and more small businesses are now looking for this business insurance. D&O liability insurance for private companies has thus become quite popular.

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D&O Liability Insurance for Private Companies

It is a common misconception that private companies do not require D&O liability insurance. It is believed that only public companies have D&O exposure, and hence only they need it. However, this is not really the case. While public companies have a comparatively heightened risk exposure, privately held companies, too, are at risk for D&O claims.

Many private companies do purchase general liability insurance, professional liability insurance, or other business insurance, but not usually D&O insurance. The main reason for not buying D&O liability insurance for private companies is the cost. It is essential for private companies to weigh the cost of D&O liability insurance against the risks of not having one. To make an informed decision, managers must understand the risks and whether companies can afford to keep such risks uninsured.

Top 3 Reasons Private Companies are now Purchasing D&O Liability Insurance

For years, D&O coverage was a crucial insurance product for public companies, and private companies have now started to understand its importance. There may be many instances wherein a private company might decide against it, but the below three reasons are good enough to make them rethink their decision.

Rise in Claims Alleging Misrepresentation or Inaccurate Disclosure

Recently more and more investor relations claims have come into focus. This is mainly related to the disclosed financial standing companies present to receive funding from private investors. In case of a company not being able to forecast accurate or realistic numbers or disclose inaccurate figures, it may face a lawsuit.

Mergers and Acquisitions

During mergers and acquisitions, the acquiring company purchases assets in return for cash or securities or both. In most cases, the investors and creditors of the acquired company are not involved in the process. In many D&O claims that have arisen recently, the investors or creditors claim that the amount was not paid or was insufficiently paid. A few other reasons for such claims include poor succession planning, mismanagement or inaccurate disclosure during mergers and acquisitions.

Lawsuits from Competitors

With cut-throat competition, lawsuits from competitors are becoming very common. Competitors can hold a director or an officer liable for trade, patent infringement or similar. For example, an ex-employee who now works with the competitor can be held responsible for using the former's confidential and proprietary information. This alleged accusation can lead to reputation loss as well as legal claims by the previous employer.

Conclusion

When it comes to insurance as a risk mitigation tool, private companies certainly do not face the same type of obligations and responsibility to the public (shareholders) that public corporations do. But this doesn’t mean that their risks are covered. Thus, D&O liability insurance for private companies should be an integral part of their risk management plan.

Written By: PolicyBazaar - Updated: 16 August 2023

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