The directors and officers who serve public companies take on personal risk. D&O insurance provides protection.
Protect Your Company, Your Directors and Your Officers
You don’t have to be a huge corporation to face D&O risks. All companies – public, private, for-profit and nonprofit – are vulnerable to lawsuits. Plus, the directors and officers who serve the company may be held personally liable.
When companies go public, the risks increase – but waiting until after you’ve completed your IPO leaves you exposed to uncovered lawsuits. Make sure you have adequate D&O insurance in place BEFORE litigation occurs.
D&O Risks for Public Companies
It’s often shareholders who believe that mismanagement has caused the company financial harm who file D&O lawsuits. However, D&O lawsuits can originate from any interested party, including customers, vendors, regulators, and competitors.
Common allegations include:
- Misrepresentation
- Breach of fiduciary duty
- Misuse of funds
- Mismanagement
- Failure to comply with regulations
The IPO process is especially fraught with dangers. If the company does not live up to expectations, or to the pitch made during the road show, statements may come under close scrutiny. Lawsuits may not occur months or even years later, but you need to have coverage in place early to ensure you’ve covered all potential losses.
How the Right Coverage Will Protect Your Directors and Officers
D&O litigation is often costly. D&O insurance provides protection by covering legal costs and settlements or awards.
When you secure sufficient D&O insurance, you:
- Protect your company from financial loss. Lawsuits are often incredibly expensive – even if you win.
- Reduce the risk of reputational harm. D&O insurance will cover your defense.
- Attract top-tier executives and board members. Experienced leaders may not want to risk working for a company without adequate insurance in place.
Key Policy Features
D&O insurance is divided into three sides, which work together to protect both the company and its directors and officers.
- Side A provides coverage directly to the directors and officers when the company cannot indemnify them.
- Side B provides reimbursement coverage to the company when it indemnifies the directors and officers.
- Side C provides coverage for the company itself when it is named in a lawsuit.
Lawsuits often name both the company and the individual directors and officers. Since indemnification is not always legally possible, having all three types of coverage in place is essential.
Frequently Asked Questions
What is the D&O coverage period?
Directors and officers insurance works on a claims-made basis. This means you have coverage for claims you report while the policy is in force, as long as the triggering event occurred after the retroactive date.
You can add tail coverage to gain an extended reporting period. This is important in the case you need to file claims after the policy has expired. For example, when a company closes, it will typically allow its coverage to lapse. However, someone could still file a lawsuit and individual directors and officers could still be held liable.
It’s also important to be mindful of the retroactive date, which is usually the first date when you took out continuous coverage. You will not have coverage for events that occurred before the retroactive date, even if the lawsuit is filed while the policy is in place. Companies that secure D&O insurance after they’ve already gone public may find themselves without coverage for events that took place during the IPO process.
Do policies include tail coverage?
Lawsuits are often filed months or even years after the events that triggered them. If coverage has lapsed in the meantime – for example, because the company has gone bankrupt – the directors and officers may be left facing a lawsuit without coverage. Tail coverage provides protection, and NSI can help you secure tail coverage with your D&O policy. Learn more about tail coverage.
Is Side A coverage really necessary?
Yes, Side A coverage is important. Although a company might intend to indemnify directors and officers in the event of a lawsuit, this isn’t always legally possible. For example, the lawsuit may occur after the company has gone bankrupt. In addition, shareholder derivative lawsuits – in which shareholders sue the directors on behalf of the company – may bar indemnification.
