Executive Risk Newsletter | Q1 2023
Why Private Companies Need D&O Insurance
Directors and officers (D&O) insurance provides corporate directors and officers with coverage for managerial decisions that negatively impact the company. This insurance may generally cover legal fees, settlements, and other costs related to their defense. All types of businesses should seriously consider D&O insurance, but there’s a common misconception that private companies may not need to purchase this type of coverage. However, even small companies with no formal board of directors or shareholders can have D&O exposures. In fact, more than 25% of private companies reported a D&O loss over the span of three years, with 96% being negatively impacted financially, according to a study by insurance company Chubb.
D&O claims against private companies can be severe and result in costly litigation. A D&O policy can be used to:
Protect the personal assets of D&Os and those of their spouses and estates
Protect the income statement and balance sheet of the company
Attract and retain qualified outside directors
Establish a relationship with an insurer before a potential initial public offering
Avoid diverting management attention to protracted and costly litigation
Common D&O claims include breaches of fiduciary duty, failure to comply with regulations, a lack of corporate governance, creditor claims and reporting errors. These can be brought forth by various parties, including:
Customers, clients and consumer groups—Common claims include harassment, discrimination, civil rights violations, contract disputes, misleading statements and false advertising.
Competitors, suppliers and other contractors—Antitrust violations; unfair competition resulting in lost business by a competitor; and the infringement of patents, trademarks and trade secrets can all result in D&O liability.
Other third parties—Claims, including environmental contamination to employee health and safety, can lead to investigations from regulatory agencies, such as the Securities and Exchange Commission.
Shareholders or lenders—Alleged misrepresentation and inadequate or inaccurate disclosure in financial reporting can bring forth claims by private shareholders, bondholders and other investors or lenders.
Employees—Harassment, discrimination and wrongful termination claims could be brought against D&Os. These claims can be covered by adding an employment practices liability policy endorsement to the D&O policy.
Mergers and acquisitions—Potential claims include alleged financial misstatements, failure to perform appropriate due diligence when making an acquisition or bankruptcy from a failed transaction.
To learn more about D&O insurance and its benefits, contact us today.
Preparing Businesses for a Recession
A recession is a prolonged and pervasive reduction in economic activity. Generally speaking, multiple successive quarters of negative growth in gross domestic product—a monetary calculation of the market value of goods and services generated and sold during a set time period within a given country—constitute a recession. Recovering from this state to the nation’s previous economic peak can take years, even after a recession ends.
Although organizations can’t prevent a recession from happening, they can take the following steps to limit its ramifications and maintain financial stability:
Establish a financial plan. It’s critical to closely monitor current economic conditions and form a plan for remaining profitable amid a recession, whether this entails adjusting specific business practices or scaling back certain operations.
Prioritize savings and cash flow. Limiting excess inventory, finding ways to reduce overhead expenses, implementing shorter payment terms for customers, and even encouraging early or advance payment options can help build up reserves and maintain a steady cash flow.
Ensure proper debt management. It’s best to reassess interest rates on current debts and consider paying down debts with the highest rates first.
Be innovative. Frequently researching the economic climate and seeking ways to adapt business strategies in response to recession-related trends can promote innovation and operational success during challenging circumstances.
Stay transparent. Open communication will help employees, customers and other stakeholders understand the reasoning behind any changes, make them feel valued and provide them with a chance to share ideas they may have to increase financial stability.
Build strong relationships. Fostering connections with customers can help bolster company loyalty when an economic downturn strikes.
Leverage effective marketing strategies. Even when an economic downturn is on the horizon, utilizing solid marketing practices should always be a top business priority.
Maintain sufficient coverage. It’s crucial to have the proper insurance to ensure ample financial protection against potential losses.
By adequately preparing for an economic downturn, businesses can be better positioned to minimize financial hardships. Contact us today for more risk management guidance.
Updated DOJ Enforcement Rules
On Sept. 15, 2022, the Department of Justice (DOJ) announced new guidance regarding the its corporate criminal enforcement efforts. The new guidance is based on recommendations from the Corporate Advisory Group—which was established to review the DOJ’s corporate enforcement efforts.
Three significant changes to the DOJ’s policies on corporate criminal enforcement include:
Companies must disclose all relevant facts relating to culpable individuals to get credit for cooperating.
The DOJ must consider all of a company’s prior misconduct when considering how to resolve an enforcement action against the company.
The DOJ will consider on a case-by-case basis whether to require an independent compliance monitor as part of a corporate criminal resolution.
This updated guidance builds on the principles of corporate criminal enforcement. For more information, visit the DOJ website.
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