Small Business Decisions Makers Need D&O Insurance

Every business – no matter how small – has exposures that can be protected by D&O insurance.

Owners of private companies without shareholders often believe they do not need directors and officers liability coverage. The misconception takes hold because small, privately held companies often have no formal board of directors or shareholders – which seemingly limits exposure to lawsuits and dismisses the need for D&O liability coverage. While logical, this could not be further from the truth.

Who Needs D&O Coverage?

Think of D&O insurance as coverage for management decisions – regardless of the presence or absence of a formal board of directors. Who makes the decisions? That's who needs protection. A D&O policy covers ALL employees and provides coverage for decisions these individuals make on behalf of the company.

Who would bring an action against a company? Your immediate thought is shareholders. You're right, but it does not stop there. Anyone who believes they have been harmed by the actions of a company can take legal action against the company and its decision makers. This can include claims from:

• Governmental and regulatory agencies
• Suppliers and vendors
• Competitors
• Customers
• Creditors
• Potential merger or acquisition partners

Take a Closer Look

Lawsuits brought by creditors, the government and regulatory agencies, while routinely overlooked, can devastate a business. The reason? Once they pursue legal action, it can put not only the company in jeopardy of surviving, but also the personal assets of those involved. Even if there is a finding of no wrongdoing, defense costs typically reach well into six figures and can cripple a small company and personally bankrupt individuals.

• Creditors: A company's financial position can change overnight. Our society financially secure companies suffer significant economic issues during the 2008 housing crash and today’s economic realities. A company defaulting on payments to its creditors becomes vulnerable to allegations of mismanagement or failure to disclose information. D&O coverage offers protection against these types of allegations.
• Government: A company can be thriving – with fulfilled employees, happy customers and everything running smoothly. Who would have reason to bring a legal action against the company? The government might. The Department of Justice is set up to protect consumers, and it can investigate and bring action against a company at any time. These claims can be impossible to predict, and they are incredibly expensive to defend. The government has little motivation to settle and hence the defense costs are high even when the case is dropped after not finding any wrongdoing. D&O coverage offers protection against these types of incidents.

Severity vs. Frequency

Every business – no matter how small – should understand they face exposures that can be protected by D&O insurance. D&O liability is a severity issue, not a frequency problem. Most businesses will not have a D&O claim arise but, if they do, the cost to defend against allegations could put them out of business if not properly insured.

This loss control information is advisory only. The author assumes no responsibility for management or control of loss control activities. Not all exposures are identified in this article. Contact your local, independent insurance agent for coverage advice and policy service.