Directors and officers risk increasingly face the possibility of litigation arising from their role in managing corporate entities, whether privately or publicly held. This is especially true of high technology companies, where both risks and investor expectations are high.
Suits filed against Directors and Officers typically allege wrongful or unfair business practices, unfair employment practices, discrimination, or failure to provide timely, accurate information to creditors and investors.
To technology-based companies, moving from pure research and development into a sales and growth phase of operations, the cost of adequate coverage for Directors and Officers (D & O) Liability can represent a financial burden. However, in order to attract the best-qualified managerial talent, a comprehensive program of insurance and risk management is imperative.
D & O coverage is provided on a claims made form. Coverage usually applies to claims reported to the insured (and possibly to the carrier, as well) during the policy period, due to occurrences happening during a prescribed time period. The time period usually begins with the initial date that uninterrupted D & O coverage was bound. Thus, to obtain coverage for current occurrences that may not be reported until a later date, it is usually necessary to:
- Make an initial purchase of D & O coverage on or prior to the occurrence date, and
- Renew coverage regularly so that it will be in effect when a claim is actually reported.
Most companies should examine the following issues with respect to managing their Directors and Officers Liability risk exposures:
- Do any of the directors have a sizable net worth?
- Has there been, or is there a Private Placement Offering or significant outside investment planned?
- Is the Board considering an Initial Public Offering (IPO) coverage during the next year?
- What expansion plans does the company have for the next year?
- Are there any threats from competitive entities, i.e. unfair trade practices, patent/copyright infringement, etc.
Selection of a broker to represent you with the limited number of markets that write Directors and Officers liability for technology companies requires close scrutiny of a specialized area of expertise. This can be facilitated by:
- Requesting a sample coverage proposal that the broker has provided other clients. Included within this proposal should be a comparison of coverage, exclusions, insuring agreements, endorsements, and general policy conditions with all companies quoted. Remember: There is no standard D&O coverage form.
- Examining the broker's D & O Liability experience with technology accounts by obtaining references to other D & O clients, identifying the number and type of clients handled by the account representative that will be representing you, their experience with IPOs, and their specific marketing plan.
- Determining whether the broker is utilizing an intermediary to assist with the coverage placement, and identification of the intermediary's qualifications.
- Submitting a complete underwriting application a minimum of 60 days in advance of the proposed effective date. This allows the broadest range of insurance company underwriters to review your information, and improves the likelihood of obtaining the best available terms and pricing, even though coverage can often be quoted and bound within two to three weeks. Since there is no standardized coverage form, you should allow yourself time to evaluate the alternative proposals that will be submitted by underwriters.
Managing and insuring Directors and Officers Liability risks, especially those pertaining to companies engaged in new and emerging technologies requires effective teamwork and communication between a Risk Manager and his broker.
This synopsis is provided by Bolton/RGV Insurance Brokers, a leading property and casualty insurance broker located in South Pasadena, California. Bolton provides competitive, carefully-designed insurance programs for the high technology community.
For further information, Bolton's World Wide Web site is at http://www.boltonrgv.com, or call (818) 799-7000.
By: Richard B. Hagemeier, CPCU
Vice President Risk Management Services
Bolton/RGV Insurance Brokers
Robert L. Davidson, JD
Executive Vice President
Bolton/RGV Insurance Brokers