Are you an executive, officer or director of a public company under $300 million in market cap? If so, the odds are pretty good that you just lost significant market value due to the Coronavirus and are in crisis mode. But another crisis could be looming –– your company and personal liability exposure. The question is: Do you have directors and officers liability insurance coverage to prevent the worst case?
Everything I am about to tell you applies to all companies, public and private, large and small, and all their respective executives and board members.
However, the following information is especially pertinent to sub-$300 million market cap companies that tend to NOT have:
- Risk management departments
- In-house legal counsel
- Cash reserves of large-cap companies
Setting Company Priorities in a Crisis
All company executives are currently in crisis mode with a significant list of concerns including:
- Are our employees safe and secure?
- What is our run rate? How long can we survive?
- Have we lost any of our funding?
- Have we secured our supply chain?
- What will the financial impact be on the business?
- Where can we reduce expenses and cut costs?
- Will we qualify for any government stimulus assistance?
- Have we adequately communicated with our customers?
- Have we adequately communicated with our shareholders?
- Have we kept our board up to date with regular communication?
Along with normal business operations, these are most likely just a few of the questions on every executive’s mind right now.
Questions Board of Directors (BOD) and Executive Team Should Ask
Of equal importance, here are the questions that are likely not on their minds but should be:
- With a rapid decline in market valuation, will shareholder lawsuits increase?
- Did our BOD and executive team exercise corporate governance with precision and zero mistakes?
- If our company decides not to pay a vendor and the company becomes insolvent, can the BOD and executive team be held personally responsible?
- If our company laid off employees, can the BOD and executive team be held personally liable for employment practice claims?
- Does our company have adequate D&O coverage in place?
- Does our company have an excess policy for Side A only?
- Do BOD members and executives have $500,000+, personally, in reserves for litigation expenses?
The Time to Think About Directors and Officers Liability Insurance Is NOW!
Yes, NOW, even as you scramble to manage all the other business and personal chaos, is the time to evaluate whether you need directors and officers liability insurance and what coverage it provides. If you do not pay attention to this NOW, it will be too late.
When Is D&O Liability Insurance Necessary?
You don’t need to have done something “wrong.” Your stock is down, and that is enough. This is business. The only guarantees in life are death, taxes and lawyers finding ways to capitalize on your misfortunes. It is almost certain that companies will see a massive increase in plaintiff’s attorney shareholder lawsuits. Attorneys prey on smaller companies because they know that corporate governance is typically less stringent and they have fewer resources to contest claims. Once lawyers find a small item they can hang their hat on, they attack the company, its assets and the personal assets of the entire board and executive team.
Typical Responses I Receive From Executives When I Discuss Directors and Officers Liability Insurance With Them
- We’ve dotted our I’s and crossed our T’s.
- We have a small board/executive team and trust their actions.
- We have a small shareholder base composed mostly of family and friends.
My Response to These Rebuttals
- All these things may well be true; however, the real question is if your company is solvent enough to weather the legal fees and losses of a substantial shareholder loss and still indemnify you? Probably not. Last I heard, average legal fees for a shareholder lawsuit are $3.5 million. For most sub-$300 million market cap companies, this will wipe them out.
- Your family members just lost 80 percent of their net worth, and most of that was from your stock. Your family will tell you they aren’t suing you, they are suing your insurance company. In addition, anything that can be perceived as insider information will surface –– a text from two years ago or a story from a family picnic.
- Shareholder lawsuits are costly, both in terms of your time and money. Even if you made no mistakes and never did anything wrong, you still have to defend yourself. How much directors and officers (D&O) coverage do you have? $1 million, $5 million, $10 million? How much capital have you raised in the past five years? You could easily chew through your D&O limits without blinking. If there is no money left to defend the company, where is the money going to come from to protect your personal assets?
The Bottom Line
Most sub-$300 million market cap companies purchased their D&O liability insurance policy to appease board members and bankers. Most, if not all, of these executive teams never took the time to truly understand their directors and officers liability policies. Due to the size of the policies, small in comparison to other public companies, they were likely purchased from someone who does not specialize in D&O liability insurance and other management liability products.
D&O liability insurance is the ONLY TRUE PROTECTION boards or executive members have to protect their personal assets from corporate liabilities. D&O insurance policies are not like other insurance policies. They have multiple layers, called “Sides”, that provide different types of protection. Understanding and advising on these directors and officers insurance policies requires specialized knowledge and expertise. Advising on these D&O liability insurance coverages for sub-$300 million market cap companies takes even further expertise.
D&O Liability Insurance: My Advice to Every Micro-cap and Small-cap CEO
- Review your directors and officers liability policies NOW. This is great advice for any business owner, BOD member or executive team. The common response will be, “I cannot afford to spend time on that right now.” My answer is you can’t afford not to –– your entire world is at risk.
- If your broker does not specialize in management liability products for public companies, find someone who does.
- Understand how a D&O insurance policy works and the different Sides –– A, B, C?
- Do you have a “Side A Only, DIC” policy? You should. This is the only insurance policy that ensures capital is available for legal defense costs and has no deductible. This is an insurance policy that is purchased in excess of your primary D&O.
- Review your D&O liability insurance coverage limits with your insurance broker, and take into consideration all your financing and business activities for the past few years. Then, adjust coverage limits accordingly.
- Understanding what type of D&O liability insurance coverage you need is complicated, but paramount for all companies. It is even more important for the directors and officers who operate them, especially right now.
JAISIN Insurance Solutions is eager to share its expertise and experience. We can mitigate your legal risk so you can focus on what’s important: the safety of your employees and the success of your business.
Schedule 10 minutes with us right NOW. We can determine if you have the right directors and officers liability insurance coverage and save you millions.