Once unknown or misunderstood by many privately-ownedbusinesses, directors & officers' (D&O) liability insurancehas been pushed onto the radar by the recession and nationalheadlines.

While the reasons for purchasing D&O liability coverage hasbecome less of a mystery, the question remains: Is D&Oliability insurance “nice” or “necessary?”

Too many private businesses still view it as a nicety, leavingthem exposed to potentially serious risk. Agents and brokers are ina unique position to help clients understand that privatebusinesses of all sizes need to protect themselves from exposurestied to D&O liability.

Private institutions typically view their public counterparts asthe companies in “real” danger of directors & officers claimsand litigation. After all, public companies are closelyregulated—required to report on progress and forced to answer toshareholders.

Leadership at private companies might not realize is that almostabout 74 percent of private D&O claims are tied to directshareholder/investor suits or employment-related issues.

While private companies may have different exposures than publiccompanies, the important thing which agents can help clientsunderstand is that private companies aren't exempt from exposures,and managing them should be a top priority.

One significant exposure facing leaders in private companies isthat their personal financial well-being could be on the line inthe event of a lawsuit against the company, its leadership or itsemployees.

For example, a manufacturer relies on a raw material supplier.If the supplier files for bankruptcy and shuts its doors, themanufacturer will most likely be forced to find a new supplierwhich could push back product delivery schedules. If customersdecide to take their business elsewhere and expenses for the newsupplier increase internal expenses, shareholders may file suitagainst the board asserting they should have known the supplier wason the verge of bankruptcy. The suit can also assert that the boardfailed to find a replacement supplier which costs the company abusiness loss as well as loss of dividends. Directors and officersmay then need to retain counsel to defend these allegations.Without the proper insurance protection, their personal assets maybe the only available source to cover potential costs.

Private companies neglecting to manage directors' &officers' risks can find themselves in other equally grimscenarios. In the event a director or officer is specificallytargeted in a claim, the company is typically held accountable aswell. In fact, eight-to-nine times out of ten, corporate entitiesare listed as the defendant in lawsuits brought against directorsand officers, leaving the company's assets at risk.

Without proper risk management practices and coverage, privatecompanies and their directors and officers face exposures thatcould potentially cripple the organization.

As private companies overlook these potential exposures, newtrends in D&O liability triggers are emerging. Actions orevents that historically occurred infrequently have become moreordinary for companies of all types, but are particularly dangerousfor private institutions because of both personal and corporatefinances are at stake.

Emerging liability triggers include:

• Bankruptcy –Between January 1 and September 30 of this year alone, more than3,600 U.S. companies have filed for bankruptcy or issued warningsaccording to The Deal, LLC. That is an increase of almost 20percent over the same time period in 2010. With bankruptcies on therise, companies are more likely to either file for bankruptcythemselves or be impacted by bankrupt partners. Agents need to helptheir clients understand the liabilities associated withbankruptcy. If a company loses its line of credit and as a result,is unable to provide services to clients, it will not have thefunds to stay afloat or pay its creditors. Not only will thecompany be exposed to law suits from clients they can no longerservice, but litigation from creditors could also be brought.

• UnfairCompetition and Deceptive Trade Practices – As competition growsfiercer across industries, more companies may find themselvesinvolved in litigation, for example, as related to patents.3 Thereis a growing trend of companies investigating competitors' patentsthat might be out of date or filed incorrectly. Any private companythat is operating with a patent (or pending patent) could be thetarget of a lawsuit from competitors, if competitors learn that acompany is misrepresenting itself or misusing a patent they mayhave.

• Talent –Unemployment statistics may be bleak, but top talent remains inhigh demand. In the past, a company might turn their cheek if anemployee was hired by a competitor, but today the scenario is oftendifferent. Employees often sign non-compete agreements, so whenhired by a competitor it can give their former employer leveragefor filing a breach of contract suit. While this can be troublesomefor the employee, it can also spell big problems for the hiringcompany. Agent and brokers need to make clients aware that formeremployers are increasingly filing suits against companies forunfair competition, deceptive trade practices and interference witheconomic advantage when the new employee retains clients, forms ordata.

Each of the three emerging liability triggers can have aprofoundly negative impact on private companies as well as theirdirectors and officers. Because a private company's finances areoften closely tied to those of its directors and officers,financial threats are far reaching. Agents and brokers can helpprotect against those threats by educating clients about what isand is not addressed under their current coverage. Clients mayassume general liability or other insurance products will sufficein these situations.

Private companies need to understand the reality of theirdirector and officer liabilities—not only that litigation or claimsare possible, but that the fallout of the economy may mean thethreat is growing. Agents can play a pivotal role in educatingclients about their risks and providing solutions to help managethem by taking the guesswork out of whether D&O liabilitycoverage is nice or necessary. When company and personal assets areon the line, the answer should be clear.

Janet Clark is private D&O product manager for TravelersBond & Financial Products.