Privately Held Company - Directors and Officers Coverage
For privately held companies directors and officers coverage(D&O) has become a mandatory coverage to attract high caliber board members.
Directors and Officer insurance coverage is put into place to protect the board members against acts of negligence committed while acting in the capacity of an organizations executive board.
The duties of a board are to perform their services with loyalty, obedience and
diligence. Managers of privately held organizations and even nonprofit
groups are particularly exposed to directors and officers claims because of
their intimate knowledge of a companies day to day operations. Typically
privately held organizations have not put the same measures in place, i.e.
segregation of duties, that a publicly held organization would to comply with
federal law (Sabranes Oxley), SEC Compliance, laws associated with raising
funds, employment regulations and other measures. Even when performing the
duties of a board member to highest possible standards it is possible for claims
to arise.
Just as is the case with publicly traded companies, the personal assets of a
director or officer of a private company may be at risk if a company can not
indemnify its board members either because of the nature of the allegation or
due to financial issues such as insolvency. Sarbanes Oxley which use to
only be applied to publicly traded companies is now being broadly applied to all
business which has changed the nature of litigation against directors and
officers. In fact, in a recent New York court decision it was held that
directors and officers of a privately held company had the same fiduciary duties
as those serving a public company.
Who can file a D&O Claim
Directors and officers policies can be triggered from within and organization,
when an employee files a claim against a director or officer, or from outside an
organization. Claims that arise inside a company from an employee could be
the result of any of the following examples, breach of contract,
retaliation(Whistleblower), harassment, employment discrimination, and wrongful
termination. Another source of claims can come in the form of alleged
wrong doing while acting in a corporate capacity and can involve investment
decisions, management failure to perform, acting in self interest, making
decision detrimental to the company, failure to raise capital, and decisions to
acquire other companies or merger. A claim can be filed against a director
or officer by creditors, shareholders, customers, vendors, competitors and even
the federal government.
Directors and Officer Coverage - What to know about Directors and
Officers
Directors and officers coverage is a specialized coverage not written on a
standard form which means that many of the coverage elements are specific to
certain carriers. I work with underwriters directly to position my clients and
understand how D&O should protect their company. There are two
particularly important and often negotiable clauses in Directors and Officers
policies. One is the so called "hammer clause" deemed this term because
when invoked by the insurance carrier the case is settled with or without the
clients consent. Below is an example of how a company can choose to fight
against the "hammer clause" and the cost they can incur, or you can take a look
at a recent case where the "hammer clause" was invoked by the carrier although
the client wanted to continue to fight against the baseless lawsuit.
American Apparel vs. Woody Allen
Example of Hammer Clause in Effect
With Hammer Clause
Without Hammer Clause
(Negotiated by broker w Carrier)
Offer to settle at $200K, No settlement reached
Offer to settle at $200K, No settlement reached
$20K Retention (i.e. Deductible)
$50K Retention (I.e. Deductible)
Defense cost $1MM, Insurer pays only up to limit of settlement offered = $200K
Defense cost $1MM, Insurer pays only up to limit of settlement offered = $200K
Cost to Insured $800K plus retention for a total of $820K
Cost to Insured $0 for defense plus retention of $50K
Total cost $820K
Total cost $50K
In the above example you can see how important is is to have the "hammer clause"
negotiated or removed should your business suffer from an early settlement on an
claim. Examples of companies that can be harmed by legal president
establishing a cause for lawsuits such as Franchisors, any company that is
subject to class action lawsuits and as in the above example a company who has
used images under its first amendments rights.
Directors and Officers - Examples of Loss
Private Company - After Seven Years, Lawsuit Arises
Cause of Action
Breach of Fiduciary Duty, Fraud
Type of Organization
Private
Number of Employees
100
Annual Revenue
$16.4 MIllion
Context of Suit
The CEO of a newly forming company, Widget Co., induced Investor A to purchase a
minority interest in the company by promising a substantial return on investment
and substantial dividends. Nearly seven years later, Investor A sues
Widget Co., and it's CEO alleging fraud, failure to comply with corporate
by-laws, exclusion of a minority shareholder from profits, squandering company
assets, and breach of fiduciary duties. Investor A demanded that corporate
records be opened for inspection and that Investor A be awarded damages of
$600,000. In its defense, New Co. said there was no wrongdoing and claimed
that no loss had been suffered.
Resolution
The parties settled for $180,000. Widget Co. incurred $50,000 in defense
costs.
- Arroyo has been in operation since 1986
- Choice - Over 35 A Rated Carriers
- Dedicated account manager
- 4 Hour turn around on certificates
- Loss prevention program
- Workers Comp Claims Management
- Personalized Risk Assessment
- 98% Client Retention rate
