Directors and Officers Liability Insurance in Private Companies
The Directors and Officers Liability Insurance does not only apply to state-owned companies. The owners of family businesses are sometimes under the false impression that they do not need coverage by this insurance. Of course, once they are forced to deal with a claim and bear the defense expenses; or even worse, when they have to pay compensations or a settlement amount, they quickly change their mind.
The directors of private companies may be sued by a number of claimants for various reasons. In fact, when the assets of a family are bound to a private company, the uninsured loss can be catastrophic. When the directors are sued, the first line of protecting their personal assets is coverage by the company. When the company belongs to the directors themselves, however, the coverage is actually provided out of their own pockets. Depending on the size of the claim and the depth of their pockets, their omission to insure the company could even lead to bankruptcy. Besides, when something goes wrong with the company, the directors are often sued alongside the company as co-defendants and then they have to assign the case to a lawyer who will handle their defense, and they will have to assume any personal liability attributed to them. If the company does not have the resources to cover the director or is not entitled to cover him, then insurance becomes even more imperative.
To summarise, it could be said that the directors of private companies need to insure their liability for the following reasons:
- Their involvement in everyday work makes directors particularly vulnerable to demands by employees.
- There is a possibility of claims for discrimination against customers.
- The complicated claims by competitors against the directors, like for violation of rules for the protection of competition and for unfair competition, may cause huge defense expenses and settlement costs.
- Investigations by government and supervisory authorities may amount to huge defense expenses even if no violation is proven.
- The company’s assets may be closely bound to the directors’ personal assets, thus making the protection of the directors essential and making the protection against claims arising exclusively against the company also imperative.
- When the company is unable to cover the directors, the insurance broker can offer this cover instead.
- Shareholders of private companies often file lawsuits for insufficient or inaccurate disclosures in financial reports and accounts included in private placement documents.
- An insurance policy may protect the private assets of the directors’ spouses as well as the inheritance they will leave behind.
- With a valid insurance, the directors can focus on managing the company’s affairs instead of dealing with prolonged legal actions.
- The directors and officers liability insurance offers good protection to a private company during the procedure of initial public challenge and its conversion into a state-owned company.
Obviously, the directors of private companies must make sure to secure insurance cover, otherwise they may endanger their personal assets which could disappear before being passed on to the next generation.
December 17th, 2019