In our previous post on D&O insurance, we provided an overview of D&O insurance and a brief discussion of the benefits of this type of policy for smaller start-up entities. As we saw, D&O insurance provides a critical type of coverage that can be very valuable for emerging start-up companies. This type of policy provides a much-needed layer of security as companies begin the process of growing and increasing their revenue streams. In this post, we want to follow up on our earlier discussion by diving into a couple of additional topics in this same area: the retroactivity of D&O policies and the benefits of these policies for established private companies.
Retroactivity: Benefits & Limitations
One of the benefits of D&O policies has to do with the fact that many of these policies are retroactive. In a D&O policy, retroactivity means that the coverage can extend prior to the date of acquisition. However, in nearly all cases, retroactive coverage will only apply if the insured can provide evidence that there was no knowledge of any incident prior to the coverage date. Consider a scenario: A company purchases a D&O policy with full retroactivity, meaning that coverage extends all the way back to the creation of the company. The company then comes forward with a claim which occurred 1 year prior to the coverage date. As it turns out, however, the company was aware of the underlying incident at the time the policy was acquired. In this case, coverage would be denied. This would be similar to a motorist acquiring a new insurance policy with an intention to cover an accident that already occurred before the policy started.
Another thing to be aware of concerning retroactivity is that many policies will come with a retroactive date. A retroactive date is a limitation on the retroactivity of the policy; basically, the retroactive date is a fixed point in time prior to which coverage won’t apply. Anything which occurred prior to the retroactive date is simply outside the range of coverage. Companies will still need to prove that an eligible retroactive claim happened without the company’s knowledge. But the retroactive date effectively restricts eligibility altogether.
Established Private Companies Benefit Heavily from D&O Insurance
We all know that large public companies can benefit tremendously from D&O coverage. And, as we discussed before, this is also the case for emerging companies, too. Established private companies – those that are neither startups nor public companies – can also benefit heavily from D&O insurance as well. Smaller private companies can benefit from these policies in many of the same ways as other companies. For instance, smaller companies may be able to attract director and officer talent with such a policy in place. The reason for this is because talented professionals will feel more comfortable knowing that they have a layer of protection. What’s more, smaller private companies can be especially hard hit by large legal fees, and so D&O coverage can literally be lifesaving in some cases.
The evidence suggests that smaller private companies are nearly as likely to utilize this type of policy as well. This is because directors and officers of such companies as equally likely to be in situations that can potentially trigger a claim. Furthermore, smaller private companies may also be in a position to benefit more heavily than other entities, because directors and officers of smaller private companies often have personal wealth invested in the company itself. An uncovered claim against a private company can wreak far more devastation than it typically can against a larger public company.
Contact Weavil Law for More Information
As readers should expect, there is far more to know about this important topic than what we’ve presented here. For more information, contact Weavil Law by calling 650-308-8187 or by email at contact@weavillaw.com.
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