Financial Loss · Insurance · Litigation

Common Question Friday – Why Do I Need D&O Insurance?

Each week, I take a common question I get from clients and prospects about insurance and answer it.  If you have a question you would like me to answer please feel free to shoot me an email at matt@mattcorc.com.

The question today is – “Why do I need Directors & Officers (D&O) insurance?”  A similar question is, “I don’t have a board of directors so why do I need D&O insurance?”

These questions which often get asked together are geared toward private companies.  It should be fairly obvious why a public company would need D&O insurance, but if not, the objective of both private and public company D&O insurance is the same…to protect the personal assets of Directors and Officers.  When you are a public company the risk is much greater.  Now let me explain why you need D&O and what it can protect you against.

Let’s start with companies that are startups and have no Board.  There are no outside investors yet and perhaps no product, but even then you could be at risk because claimants can be much more than just shareholders.  Claimants can include competitors, regulators, creditors and even customers to name just a few.  Here are some examples of how a claim could arise from someone other than a shareholder:

  • Recruiting a top sales executive from your competitor who was under contract could result in your competitor filing a suit against you
  • Claiming your company has the only approved product in the marketplace when it is not and your sues alleging false advertising.
  • Creditors allege your devised a plan to divert assets prior to filing bankruptcy.

These are just examples and there are plenty more, but notice that none of these claims were shareholder claims.  Many times insureds have done nothing wrong but that won’t prevent a claimant from filing suit.  In that case the D&O policy will respond and pay your legal fees up to the policy limit.  As you can imagine, the costs just to defend claims, even if frivolous, can pile up quickly.  Remember the objective of the D&O policy is to protect your personal assets, a claim does not have to be successful for your personal assets to be at risk and bankrupt your company.

Oftentimes clients tell me, “I am just a small company and no one would bother suing us” or “I have run five companies prior and never had a D&O claim.”  First, if you cause financial harm to another company, a creditor or any other third party no matter how small, you are at risk because people do not like to lose money.  If they speak to an attorney the probability of action against you and your company increases exponentially as do the potential costs.  Just because you have never had a claim does not mean it won’t happen in the future, D&O claims are infrequent but when they occur they are expensive. The average claim cost (award and legal fees) is well into the six figures.  Most companies that have had D&O claims could have at one point said they never had a claim before either, but in a litigious world the odds of a claim occurring are only increasing.

Once you start raising money and have outside investors the opportunity for claims increases substantially.  A large number of companies fail or lose value and this can lead to claims even if you went out of business for reasons out of your control.  As you raise money you typically put together a board of directors and at this point you usually don’t have a choice on whether to carry D&O insurance, prospective board members will require you carry D&O and may even stipulate the limit you need to carry if you want them to sit on your board.

At the end of the day, D&O insurance should be in place if you have any personal assets (house, cars, etc.) to protect.  As an officer or director of a company you can be named in a suit so regardless of how your business is structured you are still at risk.  What is often overlooked by brokers is explaining to clients what D&O covers.  If clients knew the risks that are covered by a D&O policy they would be more open to securing this coverage and less confused on why they actually need it.

Feel free to reach out at matt@mattcorc.com or matt.corcoran@alliant.com.  You can also reach me via phone at (610) 635-3326.

Financial Loss · Insurance · Litigation

The Perils of Product Liability Insurance When Mass Litigation Strikes

Based on a report yesterday from the Cook County Register, a settlement has apparently been reached between Abbvie and plaintiffs in the testosterone replacement therapy drug cases.  Currently there are 25,000 cases pending and this settlement could bring to a close the latest chapter in life science mass product litigation.  What has most likely prompted this settlement is the cost and the fact that 5 cases have went to trial and ruled on.  Abbvie successfully defended three and two others are on appeal after Abbvie was deemed not liable for the plaintiffs’ health conditions but it still resulted in large verdicts against Abbvie because they misled doctors and consumers about their product.

What can we learn from this most recent settlement?  These claims happened over a number of years and resulted in a large number of claimants.  A large number of claims over a number of years emanating from a similar product brings up “batch coverage” which I have talked about in prior posts. For life science companies it is so important to understand how batch coverage works within your policy(ies) as it could greatly impact the amount insurance companies pay and how much your company could be personally liable for out of pocket when all is said and done.  To find out more about “batch coverage” I suggest you ask your broker how your policies are structured and how they address batch coverage or reach out me directly.

The individual cases involved what appears to be punitive damages based on the large initial verdicts that went against Abbvie, $140MM and $150MM.  Insurance in many states is not permitted to pay punitive damages but if your policy is setup correctly there are workarounds. The first thing you should always do is have “most favorable venue” wording on your policy, this will allow your policy to respond according to the law of the jurisdiction most favorable to the insurability of punitive damages as long as certain conditions are met.  The second thing you can do is add what is called a “Puni-Wrap” to your program.  This is provided by an offshore insurance carrier and allows punitive damages to be paid by the insurance carrier regardless of the state.

Finally, all companies who have any connection to testosterone or any other hormones should pay close attention to their policy.  Almost every carrier now excludes these type products in their policy form automatically so it is something that needs to be something that is given consideration.  There are a long list of products that insurance companies exclude from the outset that many life science companies are not made aware of and end up being very costly.  As part of our due diligence when engaging with a new prospect we always offer to do an insurance audit of their current policies at no cost to them.  Let me know if you would like to find out more.