When it comes to insurance and risk transfer, private companies don’t face the same type of contractual obligations and responsibility to shareholders that public corporations do. These factors combined sometimes result in private companies miscalculating their ultimate business exposures, especially in the matter of directors’ and officers’ (D&O) liability.
In reality, private, for-profit companies are just as susceptible to D&O litigation as large, publicly-traded corporations, but the causes of that litigation may be slightly different. Public companies are much more likely to get embroiled in an SEC investigation or a large data breach claim, whereas smaller, private firms might see more mismanagement and misrepresentation claims arising from employees, customers or competitors. Regardless of causation, one thing is certain, litigation costs can be detrimental and destructive for private organizations.
“One trend we’re seeing in the private company D&O space is an uptick in claims alleging misrepresentation or inaccurate disclosure,” said Heather Schaaf, Underwriting Director, Executive Liability, Burns & Wilcox. “This relates to companies’ disclosed financials as they look to increase their funding from private investors. We’re seeing more investor relation claims, where companies might not have been 100% accurate or realistic in the forecasting of their financials. Obviously, if a company says they’re going to make a $20 million profit within two years, people are more willing to invest their money, but if that’s not a realistic outcome, they could face a lawsuit down the line.”
Another ongoing industry trend leading to an increase in D&O claims against private corporations is consolidation. Mergers and acquisitions (M&A) are a common trigger in D&O claims for a whole host of reasons, such as poor succession planning, inaccurate disclosure, or mismanagement of the consolidation. These claims have increased significantly over the past few years, according to Schaaf.
Despite the wide range of issues that could result in litigation, selling D&O insurance to private companies has historically been quite challenging, especially when it came to smaller firms. Insurance agents and brokers are often met with resistance along the lines of: ‘We’re small. We’re family-owned and run.’ Unfortunately, that logic has been proven wrong time and time again – even in family-owned and family-run situations.
“As an industry, we need to improve awareness around what can potentially be covered under a private company D&O policy, and we need to help small, private companies understand that they do have exposures they need to protect,” Schaaf commented. “They might say: ‘Who’s going to sue us? We don’t commit fraud.’ But you don’t need to have committed fraud to be accused of fraud. And that’s just one example. Private companies can be exposed to lawsuits that involve unfair business practices, business interference, exercising poor judgment and so on – and these are all things that can possibly be protected against with a private company D&O policy.
“Primarily, private company D&O policies are duty-to-defend, meaning insureds would have access to defense coverage when a covered wrongful act is alleged even if, ultimately, they did not commit a wrongful act. That being said, attorney fees and the cost of litigation are very high. Just the cost of defending yourself when you’re innocent could be extremely high and detrimental to a company’s financials. On a positive note, selling D&O insurance at the private level isn’t as hard as it was five-years-ago. That’s because there is increased awareness about the need for the coverage, and more understanding of how expensive D&O claims can be. Private companies are starting to realize that if they don’t have coverage and a claim is brought against them, it could wipe them out financially.”
As awareness grows around private company D&O exposures, more and more companies are looking for broad and cost-effective management liability coverage solutions. Brokers can work with a wholesale partner, like Burns & Wilcox, for their expertise and trusted counsel in navigating these solutions.