Why your privately held business
needs directors and officers insurance
January 29, 2015
Every corporation relies on the guidance of its board of directors for success. Although lawsuits against larger, publicly traded companies receive the lion’s share of media attention, privately held corporations are also vulnerable to lawsuits by competitors, government agencies, creditors and employees. You can protect your hard-earned success by purchasing directors and officers insurance (D&O) coverage for your company.
Having directors and officers insurance coverage in place can help you attract the talent you need for your board. Directors or officers of privately held companies who do not insist that the company purchase D&O insurance are putting themselves, their spouses and their estates at financial risk. D&O insurance minimizes risk to their personal assets.
Not having D&O coverage can have a serious impact on a company’s viability. Even a financially sound business may have insufficient funds to defend officers and directors in the event of a lawsuit. A D&O policy will take care of defense costs and settlement, even if the company ends up in bankruptcy.
States impose statutory duties on corporate directors. D&O coverage protects the company and its directors from claims arising from alleged or actual failure to uphold those duties. Directors are under legal obligation to govern their corporation and carry out their responsibilities of office:
- in good faith
- in the best interest of the corporation
- with the care that an ordinary prudent person in a like position would exercise under similar circumstances
Similar duties are imposed on officers of a corporation who may or may not serve on the board. Both directors and officers share the duty to:
- grow the company by prudently managing the affairs of the business
- exercise due diligence that is standard for operating the business
- maintain loyalty to the corporation to avoid conflicts of interest
- obey the corporate charter and state corporate statutes
Policy limits and other factors can vary. Your legal advisers and local independent insurance agent can help you determine how much coverage you need. Premiums are based on the coverage limit requested and other factors such as type of business, financial strength, claims history and deductibles.
Additional coverages, such as employment practices liability, fiduciary liability and cyber liability insurance, may also be available to eligible companies for an additional premium.