For Private Companies and Non-Profit Organizations
There is a popular misconception that directors' and officers' liability insurance is only needed by large, publicly-traded companies. While securities claims against large companies and their executives and board members grab the headlines in the Wall Street Journal, the fact is that D&O is an integral component of any for-profit or non-profit entity.
The latest statistics available indicate that in the last three years a third of the for-profit companies and a quarter of non-profits had a claim made against them that potentially triggered directors' and officers' liability exposure. The claim may be asserted against individual directors and officers or the organization itself. Since D&O policies for privately-held companies and all non-profits cover the organization as a named insured, the coverage has the ability to indemnify individuals, companies and organizations for defense costs, settlements and verdicts.
The fact is that in the last two years over 25,000 claims have been made against private and non-profit entities. Before examining the kinds of claims being asserted, let's look at some of the factors that contribute to this proliferation of claims. First, reforms in the late 1990's resulted in a consolidation of the big securities cases against big companies and banks in the hands of a few and select number of large sophisticated law firms. This left many firms out of the "gravy train" and pushed them into suing privately-held companies and non-profits in order to stay in business. Second, these smaller cases are easier to file and litigate against the lower hanging fruit. Third, private companies tend to have more and more "passive" shareholders (i.e. not insiders, board members nor are they represented on the board) because of Private Placements, 144A Offerings and dilution of ownership in closely-held family business due to inter-generational distributions. Fourth, polls show that the public has a rather jaded perception of non-profits and charities, with over 60% believing charities waste money. Finally, emerging issues in the context of marketing shares in privately-held companies, without the company even knowing about it, have made D&O even more important than ever.
Salient Claim Examples in Terms of Both Severity and Frequency
1. Claims by competitors alleging wrongful and unfair trade practices, usually stemming fro hiring a competitor's key employee ("stealing trade secrets") or allegations of collusion.
2. Regulatory and administrative actions by federal, state and local authorities.
3. Shareholder claims by passive shareholders alleging mismanagement, conflict of interest, fraud and/or financial misrepresentation by officers and directors.
4. Claims by prospective, current and former employees alleging discrimination, harassment or wrongful termination.
5. Claims by non-employees alleging discrimination or harassment.
It is very important that a company or organization's general liability and umbrella policies provide no protection or indemnification for the kinds of claims enumerated above. That is because general liability policies and umbrellas policies generally require an allegation of bodily injury, property damage or personal injury in order for coverage to be triggered. The acts, errors and omissions that trigger the D&O policy claim damages or allege wrongful conduct without the presence of B1/PD or Personal Injury. Accordingly, unless the client purchases D&O, these exposures are uninsured.
The staff at Brown & Brown is conversant with these exposures and the risk transfer mechanism provided by D&O for privately-held companies and non-profit organizations. Pricing is reasonable and the coverage imperative.
John D. Bouchard, ESQ.
Brown & Brown of New York