However, the reality is that D&O insurance is an indispensable part of As discussed in a May 2, 2017 memo from the Pillsbury law firm entitled “Reality Check: Private Companies Need Directors’ and Officers’ Insurance Too” (here), private companies face “increased scrutiny” from a variety of sources and the volume of lawsuits and investigations against private companies “continues to rise” and D&O insurance “provides an invaluable means to cover the ever-increasing costs incurred by companies to combat such actions.” I frequently run across private company officials who are convinced that because they have only a very small number of shareholders or owners, they will never have a D&O claim and so they don’t need to buy D&O insurance.As the authors of the law firm memo put it, “This business decision may in fact be a mistake.” The list of potential claimants on a private company D&O claim is not limited just to shareholders or owners.Other common entity exclusions that may be found on private company D&O insurance policies include antitrust and deceptive trade practices exclusion; professional services exclusion; and contractual liability exclusion.
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I am often surprised to see how frequently the wording of the various entity liability exclusions has not been addressed.
To be sure, it may be that in any particular instance, the carrier refused requests to modify the exclusions, but because these exclusions are so often modified, the absence of any modifications may also mean that the exclusions were not modified because the insurance representative that placed the policy failed even to attempt to modify the exclusions.
As the law firm memo’s authors point out, most private company D&O insurance policies define the term Claim broadly to extend far beyond just lawsuits.
The typical definition these days will also define the term claim to mean “a written demand for monetary, nonmonetary or injunctive relief” as well as “a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, nonmonetary, or injunctive relief,” subject to all of the policy’s terms and conditions.
Yet another private company D&O insurance policy exclusion that can be critically important is the public offering exclusion.
Private company D&O insurers do not intend to cover exposures arising from the issuance or subsequent public trading of company securities, so private company D&O insurance policies typically include a public offering exclusion.However, the view of some private company managers may be different, particularly for officials at companies whose shares are very closely held.These company officials may believe their company has little risk of getting hit with a D&O lawsuit and as a result conclude that they don’t need D&O insurance.Many buyers will often purchase a program with a single aggregate limit of liability applicable to all lines of coverage, so that a loss on any one line will reduce the limits available for claims arising under other lines of coverage.Purchasing a policy with a single aggregate may entail some cost savings, but it could mean that if multiple claims were to arise triggering more than a single line of coverage, directors and officers might be exposed to continuing claims with reduced or no remaining insurance protection available.As Chubb noted in its 2016 private company risk management survey report, more than a quarter of all companies reported experiencing a claim in the last three years. Among companies responding to the survey that do not buy D&O insurance, the average reported loss was almost 0,000.