Insurance Corner: Top 10 reasons a private company needs D&O Insurance

Think because your company is not listed on the stock exchange that you don't need Directors & Officers Insurance?

Take a look at these 10 reasons why you should consider it:

1. Employment related claims- Directors and Officers can be brought into a claims that are initiated by employees for wrongful termination, discrimination and harassment in a number of ways.

To apply pressure to settle the claim the employee may accuse the director or officers of making a case for the dismissal and inducing the company to breach the contract.

In a claim of misrepresentation, the individual is may be accused of making false statements regarding the conditions of employment to lure the prospective employee from his prior employer, or making misrepresentations about the company or the prospective employees role in the company. In both of these instances, an assortment of additional claims for discrimination and defamation and the like, keep the individuals named involved in the lawsuit.

2. Third party nonemployment discrimination claims- consumers and clients can bring suits for discrimination, sexual harassment or violation of an individual's civil rights.

3. Competitor claims against D & O- Actions brought by competitors such as anti-trust violations, unfair competition resulting in lost business by the competitor and infringement of patents, trademarks and trade secrets are costly to defend due to their complex nature.

4. Action from private shareholders- Private shareholders can bring claims for inadequate or inaccurate disclosure, including financial reporting and statements made in private placement materials.

5. Defense costs regulatory action- Private companies are constantly under scrutiny by the various government agencies.

Investigation and claims brought by regulatory government agencies can result in enormous defense costs for the directors and officers of the company, even if ultimately it is proven that the claims were false.

6. Protecting Individual Benefits Company- The financial strength of a privately held company is closely tied to the wealth of its directors and officers. Protecting the directors and officers benefits the individuals as well as the company itself.

7. Insolvency, or prohibition prevents indemnification- Company insolvency, public prohibition or lack of indemnification provisions in the company by-laws or charter may prevent the individual directors and officers from being indemnified.

In the case of insolvency, for example, the individuals may be forced to pay out of their own pocket for expenses such as wages or unpaid taxes.

8. Focus on company- The directors and officers can remain focused on managing the company when they know adequate D & O coverage is in place, rather than making the litigation the centre of their attention.

9. Creditors claims for misrepresentation- Creditors are now suing individual officers & directors, claiming that they misrepresented the financial status of the company and they would not have provided the funding if they had known the true financial picture.

10. Establish Insurer relationship- When a company is small and private, it is generally easy to find an insurer willing to underwrite the D & O exposure.

The exposure (and the premium) is small initially and it is easy to find a quality insurer to underwrite the risk.

Developing a relationship with an insurer is critical if the company has future plans to make a public offering in the future. It is much easier to work with an existing insurer than to start from scratch.

For additional information, contact Martha Marton at Tupling Insurance Brokers Limited

You can email Martha at marthamarton@tuplinginsu rance.com

Tupling Insurance Brokers is located at 1070 Innisfil Beach Road, Innisfil, ON L9S 4T9 705 431-5585