The broker’s guide to D&O for today’s private companies
Anzen 101
Don’t be fooled by the name. Directors and Officers insurance—better known as D&O—is a coverage that can extend to virtually any person who can be accused of a wrongful act while acting on behalf of a company.
In the complexities of today’s workforce, every business should have D&O coverage in place to protect themselves from claims in the form of legal action. Insurance brokers should know that this is especially true for private companies, many of which might have overlooked D&O in the past.
“It’s a long-held and common misconception that D&O is a coverage earmarked for companies with boards of directors, shareholders, or publicly traded brands,” said Willy Sundjaja, Head of Underwriting at Anzen. “In fact privately held businesses—including start-ups, family-owned, and small-to-mid-sized companies—are just as vulnerable to the risks that D&O insurance mitigates, and can best protect themselves from the fallout of costly lawsuits by having good coverage in place.”
Anzen, which specializes in D&O, is looking to change that by educating brokers about this core line of business as they appoint and onboard new partnerships across all 50 U.S. states.
Mastering D&O for private companies now will help you become a more effective broker partner for your clients in securing comprehensive coverage.
What does D&O insurance protect against?
D&O coverage is triggered by a “wrongful act,” which is defined as “any breach of duty, neglect, error, misstatement, misleading statement, omission or act” by either an individual insured (for example, an employee or executive) or by the company itself.
In the event of a wrongful act, a lawsuit may be brought against an individual or the company by customers, vendors, acquirers, stakeholders, or other parties. Statistics indicate that more than 50% of claims come from investors and creditors.
Like most liability coverage, D&O is a “claims-made” coverage, meaning that it covers claims made within the lifespan of the policy, not claims arising from the policy period after the policy has ended.
There are three key types of insuring agreements in D&O:
Side A Coverage (Non Indemnifiable Loss for Individual Insured Person) which provides coverage if the company financially can’t or won’t cover indemnification for an individual person (such as in a bankruptcy). In other words, “the individual officer is the one who's insured, and it's their personal assets that are at risk” (Investopedia).
Side B Coverage (Indemnifiable Loss for Individual Insured Person) which covers the cost of reimbursing the company for legal fees and related costs of indemnifying an individual person.
Side C Coverage (Company/Entity Coverage) which provides cover for the company entity itself. Best summarized, entity coverage essentially covers the balance sheet of the company.
Who does D&O insurance protect?
Individuals who commit or are accused of committing wrongful acts while they act in a professional capacity can—and often do—have their personal assets targeted. Insureds can file claims with their D&O insurer towards the cost of legal fees and other losses associated with a lawsuit.
Anyone acting as a director, officer, owner, employee, or in other capacities on behalf of a company can be accused of a wrongful act. And since personal assets can be targeted in a lawsuit, the individual’s spouse, partner, and family can be impacted.
What are some examples of D&O claims?
For private companies, wrongful acts that would be covered under D&O might consist of:
Misrepresenting or mislabeling a product or service
Misappropriation of trade secrets
Failure to meet financial obligations/financial insolvency (like bankruptcy)
Contractual issues (such as real estate or vendor/contractor disputes)
Mistreatment of employees (this can fall under EPLI but employees can and do sue individuals)
So long as the lawsuit occurs within the policy period (remember, D&O is claims-made) and isn’t excluded from coverage, the policy should respond.
Sundjaja, who regularly teaches continuing education (CE) courses on D&O to insurance brokers, shared the following two examples of D&O claims scenarios:
A dealership purchased land close to the Las Vegas strip as an investment and seven years later sold the land to a developer to build high-rise condominiums. The land had an air right restriction which was disclosed by the seller. After the housing market crashed in 2008/2009, the developer was unable to build on the land, and filed a lawsuit against the seller, claiming misrepresentation. Because the seller had an active D&O policy, the policy responded and provided coverage for the seller’s legal defense.
A California winery marketed their sparkling wine as champagne, a designation reserved for sparkling wine grown and bottled in the Champagne appellation of France. They were sued for product misrepresentation by a French winemaker. Because product misrepresentation was not excluded from the California winery’s D&O policy, the policy responded and provided coverage.
Proactive protection for today
A trusted underwriting partner, like Anzen, will help you stay educated about D&O trends through CE and other thought leadership. Anzen’s broad appetite includes everything from agribusiness to architects, technology companies to interior designers. For more tips on how you can level-up your D&O knowledge, and to get updates about CE courses offered by Willy and the Anzen team, sign up here and keep following Anzen’s blog.
