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Don Welker's Financial Minute

Jan 8, 2019, 9:30 AM


There’s nothing like being slapped with a lawsuit to make a business’ management team wish they had proper insurance in place. For smaller businesses, Directors and Officers Insurance (“D&O Insurance”) often falls into this category, as they mistakenly believe it’s not something they need.

However, D&O insurance is for companies of all sizes because it helps protect the company’s managers, directors and officers from lawsuits claiming that they have acted wrongfully. It provides liability coverage for claims based on the impact of the decisions and actions (or lack of action) these people have taken within the scope of their regular duties.

Although a lot of people will refuse to serve on a Board of Directors if the company doesn’t have D&O insurance in place, many managerial employees do not realize that they can be personally sued for their actions as well. But the reality is, a claimant might not just go after your company’s “deep pockets.” Individuals within your company (including the owner) can be sued, too.

What happens if you don’t have D&O insurance?
D&O insurance protects the personal assets of your company’s managers and corporate directors and officers, plus all of their spouses, if they should be personally sued by employees, vendors, competitors, customers, investors or other parties, for actual or alleged wrongful acts committed in the course of managing the company.

Like any insurance policy, if you never have a lawsuit or claim, nothing happens.

But if you do need it, you’re glad you have it! Chubb’s 2018 Private Company Risk Survey found that 26% of private companies reported experiencing a D&O loss in the last three years, with the average reported loss being a whopping $399,394.

If you can easily afford a $399K (or more) loss, go ahead and “self-insure.” Otherwise, not having this can be catastrophic.

What types of things are covered by D&O insurance?
D&O coverage applies to a wide variety of situations in which the directors, managers and officers of a company might be held personally liable for a negative outcome—basically a lot of things that are not particularly uncommon. This includes claims related to:

• Negligent management

• Breaches of fiduciary duty

• Employment

• Breaches of contract

• Relationships with creditors

• Regulatory issues

• Inadequate disclosures on financial statements

• And more

Don’t let a lack of insurance bring your company down
Yes, like all insurance policies, D&O coverage is not free. But is it worth the money? Any company that has actually faced a D&O claim would say “yes.”

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