November 5, 2021

D&O Insurance: How Much Coverage Should a Private Company Buy?

It sometimes can be a challenge for boards of private companies to determine the appropriate amount of D&O insurance coverage to purchase.  If you find yourself advising one of those boards, this Woodruff Sawyer blog may be helpful.  It sets forth five questions that private company boards should ask themselves when considering potential coverage limits.  These questions are:

  1. How Much D&O Insurance is Available for a Company at My Stage?
  2. Who Are the Likely Plaintiffs in Potential D&O Litigation?
  3. Are We in a Regulated Industry?
  4. Are We Just Really Big?
  5. Are We Going Public?

Woodruff Sawyer’s Priya Cherian Huskins offers up commentary on each of these questions. Here’s an excerpt with some of her thoughts on D&O insurance issues for sizeable private companies:

Difficult derivative suits with large settlements are a trend, making the purchase of at least substantial amounts of Side A D&O insurance an important purchase for large private companies. For more on this phenomenon, see my article on Five Types of Derivative Suits with Massive Settlements.

Finally, larger private companies are typically also companies that have (or are trying to recruit) independent directors, which is to say directors who have no financial sponsors like a private equity of venture capital firm.

Directors placed on boards to represent the interests of a PE or VC investor typically enjoy indemnification from that financial sponsor and can also receive insurance coverage through the financial sponsor’s insurance programs. The fact that independent directors do not have these backstops tends to drive an upgrade in a company’s own D&O insurance program, resulting in limits of at least $10 million to $20 million.

John Jenkins