Why Private Companies Don’t Purchase D&O

In looking at the top reasons private companies do not buy D&O insurance today, the respondents to the survey led to the conclusion, according to their survey, that “there’s a clear disconnect between executive assumptions about their companies’ exposure and the potential risks that they actually face.

An important contributing factor to that disconnect may come from the fact that D&O insurance insures against wrongful acts by private company directors, officers and employees. Many private companies tend to believe that their behavior could not result in legal action.

In this same vein, small or family-owned businesses often report that since “everybody loves us,” they would never be subjected to a lawsuit.

Many companies also assume that their general liability insurance offers adequate coverage for any event that might result from their actions or behavior. Unfortunately, this is not the case. General liability insurance typically insures against losses involving bodily injury or property damage, but does not step in when there has been a failure to act by the company’s directors and officers. When that happens, those who might sue can include anyone having an association with the company — customers, vendors or suppliers, government agencies, competitors, and partners or shareholders.”
 

This is very interesting feedback to have.  Here is a look at the top reasons:

  • 33% Don’t believe we need because business is privately held
  • 32% Have not experienced related incident in the past
  • 31% Don’t believe we need because business is family run
  • 22% Not required to purchase (by contract or law)
  • 22% Covered by other business insurance (e.g., general liability or Business Owner’s Policy)
  • 19% Company is financially strong
  • 11% Have company policies or procedures in place to prevent exposures
  • 10% Not aware of this insurance coverage
  • 6% Coverage is not affordable/funding is not available

 

As you can see, these are mythical in truth, but also, true in reality when it comes to the purchasers of the coverage.

 
Myth 1 – All businesses need it when a claim happens.  They don’t need it when one does not. The average D&O loss for Private Companies is $399, 394.  You need the shelter in place before the storm hits- not after.

Myth 2 – The lack of a claim up to now does not make for the assurance that a claim will not come.  Do not rely on past experience on future risk.  Instead, consider it a blessing and good management work.

Myth 3 – Family businesses especially need to heed the warnings of Myth 1.

Myth 4 – Contract or law requirement should not be a driving consideration. Exposure to risk and financial disaster planning abilities should drive the choice. I always say to my agents “If you can’t afford to buy the coverage, how can you afford to pay for a claim?”

Myth 5 – As stated above, GL does not protect a business from D&O Liability claims.

Myth 6 – Any business which is financially strong is in this position due to good management decision. Good management decision tends to make for a financially strong business. However, one of the good management decisions a board can make is to protect itself from external threats. It seems as if being financially strong and choosing not to buy D&O because of it are not compatible.

Myth 7 – Good policies and procedures in place are excellent and considered part of best practices and disaster planning alike. However, they do not prevent risk, they mitigate the exposure to it. Risk is always present just by the nature of being in business. It is the best practices we use, and the disaster planning (insurance) we have in place in case those practices do fail.

Myth 8 – This would be something from the retail agency level and educating today’s commercial consumer on today’s real risks- D&O, EPL and Cyber amongst them.

Myth 9 – Refer to Myth 4

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