Commercial Insurance Update – D&O Insurance

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December 1999

D&O Insurance

Do directors and officers of privately owned companies need coverage?

By Peter Taffae Vice President – Financial Services Division Brown & Riding

Increasing litigation is causing more companies than ever to consider directors and officers (D&O) insurance. While directors and officers liability insurance was originally designed to protect shareholders of publicly held corporations from claims, today’s coverage has expanded to meet the needs of companies of all sizes and ownership types – none of which are immune to claims against their directors and officers.

Corporate directors and officers have a responsibility not only to shareholders, but to all stakeholders, to ensure that the corporation is managed in their best interests. Because corporations are subject to extensive governmental regulation in their formation, operation and dissolution, directors and officers are exposed to personal liability. Directors and officers may be held personally liable for all losses to the corporation caused by their failure to ensure that the corporation is in compliance with applicable laws.

Size Doesn’t Matter

Increased litigation and skyrocketing defense costs are driving the average D&O payment to nearly $3.3 million, and organizations are finding that neither size nor ownership structure provides immunity from costly lawsuits. Although privately held companies have generally considered D&O coverage as being irrelevant, they are at risk. They may have even more risk than publicly held corporations because they do not have access to the same amount of resources to assure their compliance with laws and to manage their relationships with employees and their investors.

Most lawsuits don’t come from shareholders, but from creditors, contractors, competitors, government bodies, employees, and anyone else who might be affected by the decisions of directors and officers. Contrary to popular belief, these groups account for more than 50 percent of lawsuits covered by D&O liability insurance. Even if corporations have bylaws indemnifying officers and directors for suits brought against them, the corporation’s balance sheet will be ad- versely affected by legal fees and any settlement. The possibility of the corporation becoming insolvent or going bankrupt, in which case directors and officers can become personally liable, also exists.

Employment related claims are one of the fastest growing areas of litigation, and a rising source of claims filed under D&O liability policies. Employee-brought lawsuits can range from allegations of sexual harassment to age discrimination to plant closings and reduction of work force.

When someone holds a position of leadership, they are exposed to potential legal liability, regardless of the size or ownership structure of the organization. Unfortunately, privately held firms often underestimate their D&O liabilities. Lacking legal counsel or full-time risk managers, many privately held firms erroneously think that their general liability policy adequately covers all claims, including those that are employee-related.

Concern From Companies

The need for directors and officers liability insurance, regardless of company size, is clearly indicated by a study conducted by Louis Harris and Associates. The study surveyed more than 500 outside directors and included directors of smaller public companies as well as privately held firms.

The results of the study regarding smaller corporations and privately held firms are especially interesting. Four out of ten private firm directors reporting feeling that their risk of being sued was equal to or greater than that faced by public company directors. In fact, directors of small public and private companies have the highest level of concern on issues such as D&O adequacy and lawsuits.

Directors of smaller companies are becoming in- creasingly aware of the non-shareholder types of liabilities that can arise, such as employment and creditor related liabilities – and tend to be more involved in day-to-day decision making. This may explain why they feel more exposed to the liabilities that some of their decisions could create.

It is important that insurance brokers and agents help small and mid-sized businesses understand that D&O issues are not just relevant to large, publicly held companies. Large or small, public or private – no one is immune. An uninsured D&O claim can financially devastate both corporations and individuals. With litigation on the rise and claims frequency increasing, average costs for D&O claims are exceeding $3.3 million. Justification and need for D&O cov- erage exists for companies of all sizes, public and private.


Reprinted courtesy of INSURANCE JOURNAL Copyright © 09/06/99, Wells Publishing, Inc.

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.


Online Criminals Threaten Businesses

The Internet has drastically changed the way many people do business. We can now shop for anything from groceries to clothing to even cars online without leaving the comfort of our homes. However, this new technological age has also spawned a new breed of criminals. In 1998, more than 50% of all businesses reported some type of losses which totaled more than $200 billion.

According to Candysse Miller, regional director of the Western Insurance Information Service, “While a mousepad won’t kill you, it can kill your business.” This technological age graffiti has produced a need for insurance coverage that can protect businesses against high-tech thieves.

Most business insurance policies do not cover losses resulting from “Cyber Crimes.” However, there are anti-hacker policies available that cover losses like theft of securities or tangible property via computer, software damage and business interruption expenses.

Prior to obtaining insurance, companies generally must undergo a computer security assessment to determine their amount of risk. A business that determines it requires $12 million worth of coverage would pay about $25,000 a year. The WIIS suggests companies use the following tips to protect themselves from cyber criminals:

 Assess information assets and vulnerability

 Identify potential enemies

 Establish strict company policies as to who has access to what types of information, and use the employee handbook to publish this information.

 Periodically change employee passwords.

 Install an intrusion detection system on your computer system.

 In the event an attack occurs, call in a computer forensics investigator who may be able to find “electronic fingerprints” that may help determine the identity and/or location of the perpetrator.

Remember that the damage caused by one hacker could result in losses in the million-dollar range for your business. While anti-hacker coverage can help offset losses in the event of a breach of security, it also proves valuable in that in that it forces companies to become more aware and involved in the protection of their computer systems.


Facts About Insurance Fraud

If you own a business, you are a target for fraud. Those especially vulnerable include retail stores, restaurants, casinos, tourist attractions, and government buildings.

Insurance fraud is the second largest economic crime in the United States, second only to tax evasion. It represents a multi-billion dollar cost each year to every American business in the form of higher insurance premiums, taxes, and costs of other goods and services.

The Coalition Against Insurance Fraud says that insurance fraud is not a victimless crime. Because businesses suffer an enormous financial toll, these costs must be passed along to the consumer, thus affecting every sector of American life.

However, the insurance industry is fighting back. Through combined efforts of insurance companies, agents, law enforcement, insurance fraud groups, and state and federal legislators, the insurance industry is recouping $5 billion dollars in fraudulent claim payments every year.


What is insurance fraud?

Fraud is a deception deliberately practiced to secure unfair or unlawful gain, such as:

 Deliberately staging or inventing an accident, injury, theft, arson or other loss that would be covered by insurance.

 Padding or exaggerating an insurance claim.

 Charging for goods or services that are unneeded or undelivered.

 Failing to disclose truthful and accurate information on any insurance application (such as medical history, driving record, and past claims experience, to name a few).

What you can do If you suspect insurance fraud:

 Report it to local law enforcement

 Contact your insurance agent

 Call the California Department of Insurance

 Report it to the National Insurance Crime Bureau at





Direct Dial Phone Numbers

Due to a change in telephone providers at our new location, it was necessary for Cavignac & Associates to change its direct dial phone numbers from those listed in our moving announcement. The new phone numbers are as follows:

We now have “Direct Dial” access to our staff and their personal Voice Mail lines during office hours, and Voice Mail access 24 hours a day, 7 days a week. Now you can reach any member of our staff or leave a Voice Mail message without having to go through an operator.

If you forget your party’s number, call our main office line (still 619-234-6848) and press “*2 “ for direc- tory listings by first name.


Jeffrey Cavignac 619-744-0567

Robert Supple 619-744-0555

Jim Schabarum 619-744-0565

Scott Bedingfield 619-744-0560

Account Executives

Dorothy Amundson 619-744-0566

Michael Strahan 619-744-0573

Jeffrey Steen 619-744-0574

Account Managers

Penny Edgell 619-744-0568

Jolinda Kramer 619-744-0578

Susan McFarland 619-744-0572

Bettye McLaurin 619-744-0556

Celia Mondfrans 619-744-0570

Lisa Wachholz 619-744-0571

Assistant Account Managers

Sandy Hofmann 619-744-0576

Merchanti Mongold 619-744-0558

Estela Rodea 619-744-0562

Office Manager

Sue Marberry 619-744-0564

Administrative Assistant

Michael Lynn Edwards 619-744-0550

Communications Coordinator

Ginger Cornwell 619-744-0577


On 11/19/99 I called Sky Barnhart, Editor (619-455- 7717) of the Insurance Journal to obtain permission to use Peter Taffae’s article in our mailer. We need to send a copy of the completed mailer to:

Sky Barnhart



9191 Towne Centre Drive, Suite 550

San Diego, CA 92122


Special thanks to Peter and his assistant Stephanie, who gave me a call with the name and phone number of the individual to speak to at the JOURNAL. -GC