It is a common misconception that because a privately held company is not publicly traded, it does not have D&O exposure. Nothing could be further from the truth. While publicly traded companies tend to have heightened exposure by comparison, privately held companies are also at risk for D&O claims. According to a recent Chubb study of private companies, more than 1 in 4 private companies experienced a D&O claim in the last three years, and the average loss was just under $400,000.1 This paper will briefly explain the basis for liability and the sources of claims against private companies. We will also discuss common types of private company D&O claims, as well as an overview of D&O insurance and the state of the marketplace.
Directors and officers of any organization owe a duty of care and loyalty to that organization. This means that they act reasonably, informing themselves of material information necessary to make prudent decisions on behalf of the organization while avoiding conflicts of interest. If a director or officer breaches their fiduciary duty and causes harm to the organization or stakeholders, those directors and officers can be held personally liable for the breach. This does not mean that the directors and officers must make the “correct” decision in retrospect. The business judgment rule provides some level of protection for directors’ and officers’ decisions if they act in good faith and adequately inform themselves through the necessary due diligence in their decision-making. This doctrine does not provide a safe harbor for failing to make a decision or consider an issue; nor does it apply to a decision made without the requisite diligence and information.
