Directors & Officers (D&O) insurance protects corporate directors and officers from personal liability for “wrongful acts” – e.g. errors, omissions, breaches of fiduciary duty, misrepresentations, etc. Many privately-held businesses assume they are at lower risk (no public shareholders or activists), but that is a misconception. In fact, family or employee-owned firms face many of the same exposures as larger companies.
A survey by Chubb found private firms that experienced D&O claims had an average payout of about $387K (max $17M), with 96% suffering financial loss and many seeing reputational impact. Common reasons private firms skip D&O include “we’re a private, closely-held business” or “we’ve never had a claim,” but insurers warn that these justifications are misguided. Without D&O insurance, directors’ personal assets (and the company’s) are unprotected against lawsuits or regulatory actions arising from their management decisions.
While coverage language varies from policy to policy and risk characteristics of an insureds operations, the following are some areas of vulnerability potentially addressed by directors and officers insurance.
Directors can be sued over business deals – e.g. a supplier or partner alleging misrepresentation or breach of contract, or a co-buyer accusing the company of unfair dealing. In one such case, a private company’s CEO was sued over a failed property sale; the D&O insurer covered $500K of defense costs.
Competitors or customers may allege unfair competition, intellectual property or trade-secret misappropriation by former employees or the company’s leadership. AIG reports a case where a former employee took confidential data to a rival and the company’s D&O insurance paid $5M under the policy to settle.
Investigations or lawsuits by regulators (e.g. SEC, DOJ, FTC, State AGs) for alleged price-fixing, fraud, consumer protection violations, environmental or tax noncompliance, etc. For example, one private-CEO was indicted for a bribery quid-pro-quo in securing state contracts, and the company’s D&O policy funded roughly $7M of defense costs.
Even private owners or investors (including family members, employees with equity, or venture lenders) can sue for breach of duty. Disgruntled minority owners or partners may bring derivative suits or oppression claims. In one example a land-investor sued the directors for fraud and sham transactions – defense and settlement exceeded $1.2M.
Importantly, many D&O policies define a “claim” broadly to include regulatory investigations, subpoenas or Civil Investigative Demands. Thus an SEC or consumer protection inquiry can itself trigger coverage (at least for defense costs). Courts have generally found that government subpoenas often qualify as a covered “claim,” though policy language varies.
In short, private boards and executives can be sued by any aggrieved party – not just outside shareholders. Customers, vendors, competitors, lenders, government agencies and even disgruntled employees (outside of typical employment claims) may target the company’s leaders. For instance, state attorneys general have pursued private company directors in consumer fraud or antitrust cases. Because private D&O policies typically cover all “wrongful acts” by covered managers (with only specified exclusions), they can respond to this wide risk landscape, as private D&O forms are generally “true all-risk” policies – covering any allegations unless expressly excluded.
A company’s former engineer left to join a rival and allegedly took confidential product designs. The company sued the ex-employee and competitor for breach of contract, theft of trade secrets and interference. The D&O policy ultimately paid about $5 million in settlement and legal costs.
A private company CEO was indicted for arranging a “quid pro quo” to win a state contract. The directors’ D&O insurer funded roughly $7 million in defense costs to handle the criminal and civil investigation.
After a refinancing, the company’s lenders claimed the directors had breached fiduciary duties and committed fraud. The case (filed by a noteholder) alleged several torts and fraud. The directors’ D&O coverage contributed significantly toward a $20 million settlement
In a bankruptcy asset sale, the buyer and trustee accused the private company’s D&Os of misusing funds and concealing assets (fraudulent transfer). The claim was settled, with the D&O insurer covering about $750K in defense and settlement.
Shareholders of a JV alleged the company’s officers diverted a $12 million loan for personal uses, causing the project to fail. The D&O policy paid roughly $2 million toward settlement and defense.
An investor in a land-management company sued the D&Os for conspiracy, fraud and sham transactions (they claimed promised profits were siphoned off). That matter settled for about $1.2 million (plus defense costs).
A class of non-manager shareholders sued for negligent misrepresentation and fraud after a private company collapsed (alleging failure to disclose key information). The D&O insurer covered over $2.4 million (settlement plus defense)
A competitor alleged a former employee at a private firm had downloaded confidential business data and breached a non-compete. The D&O policy covered about $350K in defense and settlement costs.
In Canada, a partnership sued a private company and its CEO for allegedly breaching a sale agreement on valuable properties. Chubb’s D&O policy for that company paid $500,000 in defense costs.
These examples (from insurers’ own claim files) show that D&O claims can arise in many contexts – not just big public-company scandals. They underscore that a single lawsuit could cost the company and its leaders millions. D&O insurance helps ensure that valid claims can be defended without bankrupting the business or its directors.