Once unknown or misunderstood by many privately-owned businesses, directors & officers' (D&O) liability insurance has been pushed onto the radar by the recession and national headlines.

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

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

Private institutions typically view their public counterparts as the companies in “real” danger of directors & officers claims and litigation. After all, public companies are closely regulated—required to report on progress and forced to answer to shareholders.

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

While private companies may have different exposures than public companies, the important thing which agents can help clients understand 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 is that their personal financial well-being could be on the line in the event of a lawsuit against the company, its leadership or its employees.

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

Private companies neglecting to manage directors' & officers' risks can find themselves in other equally grim scenarios. In the event a director or officer is specifically targeted in a claim, the company is typically held accountable as well. In fact, eight-to-nine times out of ten, corporate entities are listed as the defendant in lawsuits brought against directors and officers, leaving the company's assets at risk.

Without proper risk management practices and coverage, private companies and their directors and officers face exposures that could potentially cripple the organization.

As private companies overlook these potential exposures, new trends in D&O liability triggers are emerging. Actions or events that historically occurred infrequently have become more ordinary for companies of all types, but are particularly dangerous for private institutions because of both personal and corporate finances are at stake.

Emerging liability triggers include:

• Bankruptcy – Between January 1 and September 30 of this year alone, more than 3,600 U.S. companies have filed for bankruptcy or issued warnings according to The Deal, LLC. That is an increase of almost 20 percent over the same time period in 2010. With bankruptcies on the rise, companies are more likely to either file for bankruptcy themselves or be impacted by bankrupt partners. Agents need to help their clients understand the liabilities associated with bankruptcy. If a company loses its line of credit and as a result, is unable to provide services to clients, it will not have the funds to stay afloat or pay its creditors. Not only will the company be exposed to law suits from clients they can no longer service, but litigation from creditors could also be brought.

• Unfair Competition and Deceptive Trade Practices – As competition grows fiercer across industries, more companies may find themselves involved in litigation, for example, as related to patents.3 There is a growing trend of companies investigating competitors' patents that might be out of date or filed incorrectly. Any private company that is operating with a patent (or pending patent) could be the target of a lawsuit from competitors, if competitors learn that a company is misrepresenting itself or misusing a patent they may have.

• Talent – Unemployment statistics may be bleak, but top talent remains in high demand. In the past, a company might turn their cheek if an employee was hired by a competitor, but today the scenario is often different. Employees often sign non-compete agreements, so when hired by a competitor it can give their former employer leverage for filing a breach of contract suit. While this can be troublesome for the employee, it can also spell big problems for the hiring company. Agent and brokers need to make clients aware that former employers are increasingly filing suits against companies for unfair competition, deceptive trade practices and interference with economic advantage when the new employee retains clients, forms or data.

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

Private companies need to understand the reality of their director and officer liabilities—not only that litigation or claims are possible, but that the fallout of the economy may mean the threat is growing. Agents can play a pivotal role in educating clients about their risks and providing solutions to help manage them by taking the guesswork out of whether D&O liability coverage is nice or necessary. When company and personal assets are on the line, the answer should be clear.

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

Special Reports /

D&O Liability Coverage: Nice or Necessary?

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