Insure This By Bill Velin bill.velin@wellsfargo.com

Directors and Officers Liability for Privately Held-Companies

common perception of private com- pany owners is that they do not need to purchase Directors and Officers liabil- ity coverage. This is due to the fact that most lawsuits involving private D&O are quietly settled and are not splashed across the front page of the Wall Street Journal like many of the claims brought against pub- lic companies. However, private compa- nies are often sued for events that are not covered by general liability, employment practices, or fiduciary liability policies. Further, it is often the case that employ- ment practices liability insurance (EPLI) is often confused with D&O as well as employee benefits liability E&O. These specialty package policies have become extremely popular as small to mid-size companies with arguably less overall exposure learn they can purchase a single policy covering all of these expo- sures. Even though these policies offer a number of different options, many pri- vate company owners still decline to pur- chase private D&O coverage in spite of the fact that the incremental cost makes it fairly inexpensive.

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Private company owners should con- sider that any lawsuit against a small or mid-sized company is not only extremely expensive in terms of legal defense costs, but also takes a tremendous amount of the owners time and energy, taking away from their ability to manage the day-to- day operations of the company. This can cost substantially in lost opportunities, dis- satisfied customers and employees, and a host of other potential problems. Therefore, the primary benefit of hav- ing these coverages is having an experi- enced insurance company who will appoint an outside legal firm with expert- ise to handle these issues. This will signif- icantly reduce the impact of the lawsuit on the owners time. Considering the cost of the coverage, having an experienced legal team to handle such a claim is invaluable. Additionally, private company

14 Automotive Recycling | May-June 2015

D&O is usually written on a “duty to defend” basis. The expenditure for defending a claim alone can justify pur- chasing the coverage!

D&O policies do not cover suits by and between current directors, officers, and employees. However, former officers and employees as well as other third parties (ie. investors) claims for mismanage- ment resulting in loss of income and/or value are typical claims found in private D&O policies. It is imperative to keep in mind that when making business deci- sions on behalf of the company, directors and officers must fulfill two basic fiduci- ary duties: 1) the duty of care and 2) the duty of loyalty. It is also important to know that the D&O policy covers the entity (the company) as well as the directors, officers, and owners.

The duty of care requires that the direc- tors, officers, and owners are diligent in managing the affairs of the company. The duty of loyalty requires that there be no conflict between the interests of the directors and officers and the companies interests. The directors and officers may not engage in personal activities that would injure or take advantage of the company. For example, a company offi- cer might see an opportunity to expand the company’s business, but instead of having the company capitalize on that opportunity, the officers starts his own company to do that business. The officer may be sued by the company or the owner or shareholder, alleging that the officer usurped a corporate opportunity in violation of the “duty of loyalty.” It is also important to know who can sue and who is getting sued in the D&O arena. A recent study reported that private com- pany D&O claims come from the follow- ing sources: Employees (51%); Customers and clients (21%); Competitors (5%); Shareholders (16%); Government (3%); and Other Parties (4%).

EMPLOYEES: In a private company,

important decisions will often be carried out within the job description of an employee. Rather than offering coverage to employees just for employment prac- tices liability, a private company will usu- ally add their employees for any act, error, or omission they may commit in their capacity with the company. GOVERNMENT: Companies often conduct business that is regulated by one or more governmental authorities. These governmental authorities are vested with enforcement rights that allow them to bring actions on the governments’ behalf for alleged violations of regulations. These claims are usually not only focused on the company itself but may also impli- cate the owner and officers, and open exposure to out of pocket legal expenses. COMPETITORS: They can bring claims alleging any type of wrongdoing that has harmed them. Claims such as unfair com- petition and restraint of trade or inter- ference with contractual relations are very common. These types of claims are also usually brought against the company but may implicate owners and officers. The bottom line is that owners of pri- vate companies that have not traditional- ly purchased private company D&O insurance need to be aware of the afford- ably-priced policies available to them in today’s market. The value of the duty to defend contract, defense coverage pro- vided by experienced insurance compa- nies and legal counsel, and com- prehensive employment practices liabili- ty coverage as a stand-alone policy can protect one from ruin. Many cases of per- sonal liability can only be covered by pri- vate company D&O. Coverage can save the company from financial ruin in the event of one of these claims.

For more information on how Wells Fargo In- surance Services can benefit your business, contact Bill Velin at 800-328-6311, ext. 3039, direct 952-830-3039, or by e-mail bill.velin @wellsfargo.com.