Directors and Officers Insurance for Non-Profit, Private and Public Companies

Examples of D&O claims can be found all over the internet. Doing a recent search for "D&O claims examples" provided me with more than 28,000 hits. As such, I won't bore you with claims examples but rather what to look for when you approach a new prospect. Suffice to say that claims can come from investors, donors, competitors, creditors, employees, and regulators, and that they can be extremely difficult, disruptive and expensive to litigate.

When looking to sell an insured a D&O policy the first question you need to ask is "Does this company qualify as a private for-profit company, a publicly traded company, or are they a non-profit organization?" Now this may seem like a pretty straightforward question, however in rare and sometimes unexpected places, the answer can be a little tricky. Take for instance an ethanol plant built in the midwest. The idea is to turn corn into a bio-fuel - not an easy process. Like most things that are not easy, it's also not cheap. As such, building these plants takes an incredible amount of upfront capital. These plants are not publicly traded companies but are often built by venture capital firms that are using the money entrusted to them by thousands of investors. While it may have been set up as a private company, the directors and officers policy was written as a public company due to the potential of a class action law suit brought about from investors. While cases like this are rare, it is something to be aware of.

The next question you need to ask is "Can I get a copy of your financials?". For public companies these are easy to obtain. Many non-profits will post financial information on websites in order to show donors how money is being spent. The third category, private companies, are often the most reluctant to share information and these will likely be the entities you are most commonly dealing with. A lot of small business owners are concerned with a competitor finding out information about them. Others are concerned that personal information will somehow be made public. It is common that you as the agent, we as the wholesaler and the underwriter will all be asked to sign a non-disclosure agreement. This is a common request so do not be offended if a client asks you to sign one.

Why do I need financials? Other than claims history, the financials will be the most important information in determining price. That does not mean the higher the revenues the higher the pricing. Sometimes it can be the exact opposite. A company that only has $1,000,000 in revenues but $100,000 in profits at the end of the year is in much better shape on the surface than a company with $5,000,000 in revenues but running at a $100,000 loss. Of course, if our company with the profit has a $2,000,000 loan that comes up in 6 months and our company running at a loss had a one time expense for facility improvements of $1,000,000 6 months earlier, suddenly the entire financial picture of both companies is turned upside down. That is why it is important to get the entire financial picture, not just a snap shot of one or two "key" numbers.

"How much is this going to cost?” Price varies depending on the size of the company and what options are purchased. Small non-profits and private companies can expect premiums to start around $750 for a $1MM limit. Small cap public companies can plan on premiums starting in the range of $7,500-$10,000.

"What are the important coverage issues?" There is probably no other type of insurance coverage for sale in the world with more complicated wording and more vastly varying coverage provisions from one quote to another. Some policies cover the entity going back to its formation date and every person ever involved with it, others cover only one particular board member from date of binding forward. Most are somewhere in between. There is fine print in every other sentence of every policy that can have coverage ramifications you'd never dream of until you are facing a declination of coverage on a huge claim that could have been avoided if an experienced broker like Gaddis Co. helped you negotiate terms.