Private or Public Company, Same Risks?
A common misconception is that Directors and Officers litigation and thus Directors and Officers Liability Insurance only affect publicly traded companies. This is largely due to the fact that a vast majority of the landmark cases and scandals that have garnered significant media attention have been related to public companies. It is thus easy to forget that private companies are subject to essentially the same set of corporate rules and regulations as public firms and, consequently face similar management liability litigation risk to that of public firms.
In Canada, companies are subject to Federal and Provincial company laws such as the Canadian Business Corporations Act, the Loi sur les sociétés par action du Québec and the Quebec Civil Code, as well as increasingly rigorous environmental, tax and employment legislation which are persistently adding to the management care and diligence onus entrusted to Directors and Officers of any company or organization. An alleged breach of any of the above could easily lead to expensive litigation.
D&O insurance essentially protects a Director or Officer of a company from litigation brought by third parties and that emanate from such Directors and Officers’ management decisions. Even though management may legitimately believe to have exercised the utmost care in its decision-making, a client, an employee, a competitor, a shareholder or any other third party may see it otherwise and pursue legal action against management and the company.
As is the case for publicly traded companies, the exposure facing private companies, not-for-profit organizations and their respective management teams is certainly not uniform or invariable. Factors such as industry sector, size, growth strategy, competition, corporate structure and regulatory landscape will have a direct impact on both the nature and extent of organizations’ D&O litigation risk.
And, because we do not read about privately held companies’ woes perhaps there’s a misplaced belief that these types of claims do not happen to non-publicly traded companies; this feeling is even stronger with family-run companies. As a matter of fact 26% of private companies reported experiencing a D&O loss in the last three years*.
Many privately owned and not for profit entities would in fact become financially crippled, or even be pushed to bankruptcy, by many a suit or legal matter, so considering the purchase of Directors and Officers Liability insurance would be a prudent course of action for them.
* Chubb 2016 Private Company Risk Survey