1. D&O. I know I need it…..but when do I need to evaluate it.
Directors and Officers (D&O) coverage is one of the most important insurance policies
any emerging technology company could have. Most of these companies purchase this
coverage because the company executives understand the value of it, or the company is
being required by institutional investors. Either way, having Directors and Officers
Liability Coverage will always be a benefit to a company’s risk management portfolio.
One of the most common responses from Technology executives is “I have the coverage.
I understand D&O insurance at a high level, but not enough to know when we should
evaluate if the coverage is adequate.” Technology executives are aware of need for
D&O, but it is difficult to know when the current program should be reassessed. As there
is nothing spelled out about when the right time would be to revisit the coverage terms
and condition, below are a few instances when a company should reassess:
1. When your organization is making an operational change;
2. implementing a new strategy; or
3. seeing a turn in your business.
But you are probably saying to yourself, “These situations are riddled with a thousand
other items that are needed for a successful outcome.” You are right, but adding an
evaluation of the D&O coverage to your checklist is imperative because it can save you
future heartache and grey hairs.
If we were to take a look at the typical D&O claim
that is broadcasted across the media, it typically
involves a public company and a select group of
officers and board members that are being accused
of mismanagement. This alleged mismanagement reduced shareholder value and thus a
lawsuit was filed among shareholders. As an emerging privately-held technology firm,
you are probably saying to yourself “I am a much smaller company and all of my
investors have board representation….this sort of claim really wouldn’t apply to me.”
This example and the common statement among emerging technology company
executives are the reasons why little, if any, time is given to understanding the terms and
conditions within the D&O policy on a granular level.
What sorts of claims would an emerging technology company see that would trigger
D&O coverage? They would arise from stakeholders of your particular company. But to
fully understand the magnitude of who can bring these suits against the organization and
the individual D&O’s, we must first define stakeholders. A stakeholder of an
organization is any person or entity who has a stake in that specific organization.

2. Examples of these could include, but are not limited to, suppliers, customers,
shareholders, creditors, government, society, and so on. Upon understanding who a
stakeholder is and the fact that even our competitors have grounds to bring D&O suits
against us, we can conclude that ANY managerial decision about the direction or strategy
of a company could negatively affect a 3rd party … thus allowing a claim to occur.
Now that we understand what defines a stakeholder, you may ask “when should I
evaluate my D&O coverage?” To get a process that fits your organizational needs, you
will need to work with your insurance broker to understand what indication in your
business warrants an evaluation. However, a few common indications that span across the
Technology industry include: filing your articles of incorporation, extending board
membership to new individuals, evaluating mergers & acquisitions, potential divestitures,
IPO’s/other sources of funding, and management changes.
Any of the above activities, if executed poorly, could
adversely affect a 3rd party and create a D&O claim
situation.
Once you have decided that D&O is vital to the risk
management of your organization, the next step is
understanding what limit of coverage fits the company
needs? Typically, $20M revenue and less technology organizations with institutional
funding have limits of $3M - $5M+, depending on a few main items: the amount of
capital injected into the firm, the net worth of the board members, and the competitive
environment in the company’s specific niche. As the revenues increase, D&O limits may
increase as well. Additionally, micro cap public companies typically have limits between
$10M - $25M.
As the company grow, other items that would be beneficial to consider are: defenses
costs outside the limits, preferred final adjudication wording, choice of law firm, and
failure to maintain adequate insurance … just to name a few. Some of these coverages
come at an additional premium charge, which is why balancing cost and risk should be
reviewed consistently.
Below is a brief description of why these should be added or considered:
Defense Cost outside the limits – D&O suits are costly claims to defend. Having a
condition that provides additional limits or unlimited limits for defense cost is
favorable. It prevents reducing your policy limits that could be used for settlements
rendered against your organization.
Final Adjudication – D&O Liability excludes providing coverage for fraud, but
some exclude allegations of fraud. Having this condition on the policy requires that
fraud be found “in fact” and through a final adjudication by a court of law before
coverage would be excluded. This is important so that your directors and officers
are protected against groundless suits.

3. Choice of Law Firm – D&O insurance carriers have predetermined rates for the
attorneys they used to defend these claims and those attorneys many not include the
firm you prefer. Your broker could negotiate your D&O
insurance provider to allow your attorney to defend your
company in the event you are brought into litigation. As
the insured, you have much more leverage choosing
counsel before a claim occurs than after you are notified
of potential litigation.
Failure to maintain insurance – Many forms exclude
D&O suits for failure to maintain adequate insurance. This stems from a claim that
would typically be covered from another type of insurance policy, but falls under
the scope of the D&O policy because the pertinent line of coverage was not
purchased. Having this removed is imperative for technology companies because
the exposures are constantly changing and new insurance products are continuously
being developed. You may find yourself in an unfortunate situation where a loss
occurs and you weren’t aware that coverage was available for purchase in the
insurance marketplace.
The point is to be fully engaged with and rely on your insurance broker for guidance.
No one should know what your business potential threats and exposures are better than
you after discussing these exposures with your broker. Brokers can provide benchmarks
within your sector as to what your peers are doing while also providing additional
expertise allowing you to make the best decision for your organization. A quote from
Niccolo Machiavelli is relevant to finding a process to evaluate the D&O policy
consistently. “Tardiness often robs us of opportunity and the dispatch of our forces”. If
you are late to review your policies and adapt them to your needs, you may be faced with
an uncovered claim reducing the company’s ability to reduce its cost of risk.
Phillip Naples is an insurance broker in the Technology Client Division of Pritchard &
Jerden, Inc. He has been focusing on technology-related exposures for several years
during which he has assisted with the placement of technology risks to the insurance
market, developed new coverages, and speaks as a subject matter expert on technology
insurance products. Mr. Naples is active in the Technology Association of Georgia,
Atlanta Venture Forum, and is a sponsor and board member of Technology Executives
Roundtable.