D & O for private companies: answers to common questions.

• Author: Metzger, Carl E.
• Position: Insurance - Directors and officers' liability (D & O

Directors and officers' liability (D & O) insurance provides a critical layer of protection from the risk of personal liability for anyone serving as a director or officer of a company. Understanding how D & O insurance really works, however, is not easy. To many, the policies seem arcane, and it is hard to figure out the actual coverage. What follows are answers to eight common questions about D & O insurance.

When should a private company first get D & O insurance?

A: Young private companies historically went without D & O insurance until they became much larger businesses or went public. That practice has changed. Now, even many early-stage companies with relatively small operations have some level of D & O coverage in place.

Why? First, the coverage itself being offered by the major D & O insurance carriers is better and cheaper (relatively speaking) than it used to be because the marketplace for D & O insurance has become more competitive and better developed. Second, the directors of even small companies are seeking increased protection from the threat of personal liability.

How much D & O insurance should a private company have?

A: There is no formula or litmus test applied in the D & O insurance industry. Many early-stage private companies carry between $1 million to $5 million in limits, with more mature companies with broader operations typically carrying $10 million or more. This range is substantial, and ultimately the answer for any particular company will depend in part on how much risk a board of directors is--or is not--willing to assume.

Key factors that should go into the analysis include: the sufficiency of the company's assets to cover fully its indemnification obligations owed to its directors and officers; the volatility and litigation risk profile of the company's business and industry; the scope and size of the company's operations; the company's future prospects and expected growth; the likelihood of significant transactions, such as merger or acquisition activity, an initial public offering or even a dissolution or bankruptcy; and the history of the company's relations (and disagreements, if any) with its business partners and significant shareholders.

How much will D & O insurance for a private company cost?

A: The price of private company D & O insurance varies substantially, depending upon the company size. For a modest-sized company, $3 million of coverage can cost in the range of $14,000 to $20,000 annually.

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