Post on 14-Oct-2020
The eNTRePReNeUR’S ROADMAP
FROM CONCePT TO IPO
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You’ve just started your business . . . or you’ve grown it to a point where you have
something worth protecting. In any case, sooner than later, the issue of “what makes
sense to insure” will come up. This chapter is intended to help you answer this question.
GROWTh STAGe: RISK MANAGeMeNT FOR PRIVATe COMPANIeSOnce a growing private company determines that it wants to recruit and retain
excellent directors, it’s time to think about acquiring directors and officers (D&O)
liability insurance. D&O insurance covers directors and officers of companies when
they are sued in this capacity. Placing this insurance sooner than later gives directors
and officers the comfort of knowing that there is more than just the company’s
balance sheet standing behind them should they be sued.
Some of the reasons private companies purchase D&O insurance include:
• Attracting new directors
• Venture capital requirements
• Emerging risks
• Regulatory exposures
• Bankruptcy
• Mergers and acquisitions
• Shareholder lawsuits
• IPO considerations
Let’s take a closer look at the details of private company D&O insurance, including
how it works and what to watch for.
THE INS AND OUTS OF D&O INSURANCEIt’s helpful to understand how D&O insurance is structured and responds. There
are typically three insuring agreements in a private company D&O insurance policy:
Side A, Side B, and Side C (Figure 1).
INSURING YOUR BUSINeSSWoodruff-Sawyer & Co.
Priya Cherian Huskins, Partner and Senior Vice President
Wade Pederson, Partner and Senior Vice President
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PART I: THE SEED STAGE: STARTING A COMPANY WOODRuff-SAWYER & CO.
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only after a final judgment, insurance can cover
defense costs until then.
Insured versus insured: Private company D&O
insurance carriers will not cover claims in which
directors and officers (former or current) of
the same company sue each other. However,
companies can negotiate limited exceptions to the
exclusions (also known as “carve-backs” that give
back coverage), for example, limiting the number
of years a director must be separated from the
company before the exclusion no longer applies.
Duty to Defend vs. Duty to IndemnifyDefense costs are a big part of what’s covered
in a D&O insurance policy and are always part
of the total limit that will be paid for this type
of insurance. Private companies can purchase
either a duty to defend or a duty to indemnify
policy.
Side A responds when a company is unable
to indemnify its directors and officers. Side B
reimburses a company for its indemnification
obligations to its directors and officers. Side C
provides corporate coverage whenever the
company is sued alongside directors and officers.
Private companies can purchase D&O insurance
as a stand-alone product or combined with other
policies for cost savings. See Figure 2.
Negotiating exclusionsA policy exclusion removes a particular claim
from the policy’s coverage. The scope of these
exclusions can sometimes be negotiated. Some
areas of negotiation include:
Intentional fraud: Insurance carriers will not
insure intentional fraud, but companies can
negotiate the point at which the conduct is
excluded. If the fraud exclusion can be triggered
A B C
PersonalProtection Balance Sheet Protection
• Traditional ABC policy strikes a balance between personal asset protection and corporate balance sheet protection
• Vast majority of companies incorporate primary ABC coverage as a means of risk transfer
TRIGGERActions of entity for securities,EPL & limited other claims
PAYSOn behalf of entity
RETENTIONApplies
RETENTIONApplies
RETENTIONNone
PAYSOn behalf of entity(Fundsindemnification of D&Os)
PAYSOn behalf of D&Os
TRIGGERActions of D&Os that aren’t indemnifiable
TRIGGERActions of D&Os that are indemnifiable
FIGURe 1 Traditional ABC Policy for Private Companies
©Woodruff-Sawyer & Co. 2017 (used with permission)
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Younger and smaller private companies will
typically buy only $1 million to $3 million in limits.
As private companies mature, they start to look
at $5 million to $10 million in limits. Amounts
may be higher for companies in highly regulated
industries.
The next question is usually: How much will the
insurance cost? The answer depends on many
factors, including the overall state of the D&O
insurance market.
In purchasing D&O insurance, pricing should
not be the end of the analysis. D&O insurance
is highly customized—in other words, policy
contracts are not standardized. The same
carrier has the discretion to offer many different
versions of policy terms to different companies.
At the end of the day, money spent on an
insurance program with broad coverage terms
offered by a quality insurance carrier will
provide a better value for a company than a
less-expensive program with poor contractual
terms offered by a carrier that has no intention of
paying future claims.
‘Duty to indemnify’ means a company selects its
own counsel. However, the carrier will only pay
“reasonable” defense fees. The difference between
what a company thinks is reasonable and what an
insurer thinks is reasonable can be significant.
‘Duty to defend’ means the insurer chooses the
defense counsel, who may or may not be the
company’s first choice. However, the upside
to a duty to defend policy is that the insurer
is typically responsible for paying the defense
fees for all allegations brought in the litigation
and not just the allegations that are covered
under the policy.
Choosing Policy LimitsHow much coverage does a company need?
Two common ways for a company to identify a
prudent limit for its D&O insurance policy are to:
• Benchmark against similar companies; and/or
• Work through common private company
litigation scenarios and then contact outside
counsel to understand the costs associated
with them.
FIGURe 2 Menu Driven Approach
©Woodruff-Sawyer & Co. 2017 (used with permission)
• Carriers provide a singlepolicy with options to addmultiple coverage lines.
• Creates a customizedcomprehensive coverageprogram under one policywith one carrier.
Fiduciary Crime
ManagementLiabilityProgram
Kidnap &Ransom
Directors &O�cers
Employment Practices
• Buyers have the option tocombine limits for premiumsavings or purchase separatelimits for each coverage.
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where a company learns if the broker wants to
work on commission or fee. Finally, a company
can find out if its prospective broker is planning
to charge separately for certain services, for
example, claims handling.
International D&O ConsiderationsIf a company has foreign subsidiaries, it will
want to consider how to optimize its global
D&O insurance program. The issue is that while
your D&O insurance policy probably says that
it provides coverage on a worldwide basis,
whether or not insurance can legally respond in
a local jurisdiction depends on the laws of that
jurisdiction.
In many countries, the stakes may be quite low
because advancing legal fees from the local
subsidiary to an individual director or officer is
easy and straightforward. Where this is not the
case, however, there is a lot more pressure to
have local insurance that complies with all local
regulations.
Depending on a company’s situation, there
are options. Some companies will rely on the
worldwide coverage provided by a master
program and call it a day. Others will decide to
take advantage of certain features that some
European-based D&O policies can provide when
it comes to international coverage.
Many companies will decide to purchase a
few local policies in some of the countries
where the company does business. Some
conservative companies will decide to purchase
D&O insurance in every country where they do
business. A few companies may even build a
tower of insurance for the “rest of the world” that
is separate from the insurance program they use
for their U.S.-based exposure.
In all cases, decisions about international D&O
insurance coverage are rarely static. Part of the
risk management process is to routinely review
the international program with an eye on the
changing business, political, and regulatory
environment.
Choosing a BrokerBecause D&O insurance is a highly customized
financial product, partnering with the right
insurance broker is critical. Here are five key
questions you might ask when looking for an
expert partner.
What can you tell me about your firm and its
culture? This question allows interviewees to give
an overview of their brokerage firm, including
their culture. Listen for things like team cohesion
and stability. This matters because in difficult
situations companies need brokerage teams to
row hard in the same direction on their behalf.
In your view, what are the key exposures my
company faces? This question is a chance to
get free advice from the experts as well as
gain insight into how the brokerage teams are
thinking about a company’s risk. In the best case,
the answer to this question will also tell if you like
the broker’s style of communication.
What do I need to know about the insurance
policies you would recommend and your process
for placing them? An insurance program needs
to be customized for a company’s specific risk
profile. This question will give good brokers the
chance to identify critical insurance policies and
share their process for placing them.
What additional services do you provide?
This question is about client resources. Some
brokers have invested more than others in client
resources such as access to databases, secure
online platforms, claims advocacy, and other
client services. Some of these services will be
more useful to you than others. In general, most
sophisticated brokerages provide more support
than just placing insurance.
What will all of this cost? Cost is important, and
a good broker will break down the costs in an
understandable way. Remember that the cost of
insurance has two elements: the premiums paid
to insurance carriers and the amount paid to the
broker. In this part of the interview, look for how
the broker thinks about premiums and how the
broker manages premiums over time. This is also
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4. Invest in Insurance for Operational RisksCompanies with unique operational exposures,
such as those that use hazardous chemicals
or companies in the life sciences sector, will
want tailored insurance for these exposures.
Most businesses will also accumulate some
quantity of sensitive information they have
an obligation to protect, even if only on the
company’s own employees. Cyber liability
insurance has come onto the scene to address
risks associated with the financial impact of a
data breach.
eXIT STAGe: RISK MANAGeMeNT STRATeGIeS FOR PRIVATe COMPANIeSAt some point, your growing private company
might be interested in a liquidity event, be it a
merger and acquisition (M&A) or IPO. Insurance
can help you optimize these outcomes.
THE M&A ROUTEReps and warranties insurance: A merger or
acquisition is a common exit for many fast-
growing private companies. During M&A,
representations and warranties insurance can be
a powerful bargaining chip for both buyers and
sellers. This insurance protects against breaches
of the representations and warranties made in
a purchase and sale agreement. This insurance
is typically used to reduce the total size of the
escrow in the deal.
Buyers in the M&A transaction are the ones
who most frequently purchase this insurance
(because buyers can insure against a seller’s
fraud), but it is available to the seller as well.
If a buyer agrees to purchase a company based
on the reps and warranties given and those
reps and warranties turn out to be false, the
buyer has the right to submit this claim to the
insurance carrier. Similarly, should the seller
purchase the insurance and the buyer file a
dispute, the seller can expect the insurance to
cover the claim.
OTHER INSURANCE PRODUCTS TO MANAGE RISKD&O insurance is not, of course, the only
insurance that growing companies need to buy.
Consider the following guidelines when putting
together your company’s entire insurance risk
management program:
1. Invest in Insurance When it’s the LawCertain insurance coverages such as workers’
compensation or auto liability for owned
vehicles are statutorily required in nearly every
state. Other insurance requirements will vary
by industry, for example, clinical trial insurance
for life science companies. Companies will want
to work with trusted advisors such as their
attorney and insurance broker to understand
the insurance requirements in each state or
country where a company does business or has
an office.
2. Invest in Insurance to Fulfill Contractual RequirementsSigning a lease, entering into an agreement
with a prospective customer, and signing up
with a preferred employer organization are all
examples of contracts that require a company to
maintain basic commercial insurance. Along with
legal review, have an insurance broker review
the details of the insurance and indemnification
provisions in all your contracts.
3. Invest in Insurance to Transfer Catastrophic RiskA catastrophic, multimillion-dollar claim can
quickly strangle a growing private company,
for example, an auto accident involving an
employee on work assignment with major
injuries to third parties or a class action lawsuit
related to a defective consumer product. For
these scenarios, products such as a general
liability policy and auto insurance are key. It
usually makes sense to supplement these with
an umbrella policy that provides an additional
layer of protection.
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of the company know of nothing that’s likely to
give rise to a claim (a “warranty statement”).
When contemplating an IPO, consider the five
key steps to building a D&O insurance program
that run parallel to the IPO milestones that a
company must achieve (Figure 3):
• Prepare
• Launch
• Broker
• Implement
• Support
Let’s look at those five steps in closer detail.
The first step is to prepare, which includes
developing a risk-management strategy. This
process takes place while the company is
drafting its S-1. Some of the key questions that
need to be answered in this stage are:
• What is the timing of the IPO and is the
company on a dual track?
• What is the size of the IPO and will there be
selling shareholders?
• What is the company’s philosophy on risk
transfer and buying D&O insurance limits?
• Which insurers best fit the company’s needs?
• Does the company face any unusual risks?
• Who are the key executives and who will be
involved in the insurance process?
• How involved does the board of directors want
to be in the insurance decisions?
In addition to its D&O insurance, a pre-IPO
company will want to upgrade all of its other
lines of insurance as well.
The next stage in the D&O insurance process
ahead of the IPO is launch. This process
typically takes place after a company files its
first S-1 registration statement with the SEC.
During this time, companies want to make sure
their insurance broker is modeling policy limits
based on their unique needs and negotiating
with the insurance markets on the company’s
behalf.
D&O insurance tail policy: When a company is
acquired, its existing D&O policy will terminate
at the end of the policy year—not ideal if you are
worried about claims that may arise against your
directors and officers in the future. A tail policy,
also known as a run-off policy, is the solution.
Because D&O insurance is a claims-made type of
policy, the D&O insurance policy that responds
to a claim is the policy that is in place at the time
the claim is made. So, for example, if in 2016 a set
of actions took place that is later challenged in
2017, it’s the 2017 policy that would respond.
This is where a D&O tail policy is crucial. After
companies sell themselves, they stop renewing
their D&O insurance. A tail policy covers
what would otherwise be a gap in coverage
for directors and officers after the sale of a
company.
The gap exists because the D&O policy of the
acquiring company will typically not respond
on behalf of the selling company’s directors and
officers for claims that arise post-closing that
relate to pre-closing activities.
It is completely standard for a buyer to allow
a seller to purchase a six-year tail policy. The
policy should be placed and serviced by the
seller’s broker. This arrangement gives the seller
confidence that, even when the company is
gone, someone loyal to the seller’s directors
and officers will be in charge of the insurance
program that protects them.
THE IPO ROUTEAn IPO is an exciting time for any private
company. But with it come risks—especially for
directors and officers.
When it comes to D&O insurance and an IPO,
it’s best to ramp up the D&O program during
the renewal cycle the year prior to the IPO. This
allows companies to make a few simple—but
strategic—moves. For example, increasing
limits early on gets the all-important warranty
statement out of the way. Whenever a company
purchases a higher limit of insurance, the
company has to tell the insurer selling the new
layer of insurance that the directors and officers
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insurance broker to bind the D&O insurance
program.
Finally, expect ongoing support from your
insurance broker. Keeping directors and officers
up to date with training and advisory services
helps to mitigate risk all year long. Of course,
should the need arise, companies will also
want the benefit of robust claims handling and
advocacy as well.
When done well, insurance can be extraordinarily
useful to a growing company, serving to support
and protect a company’s growth over time.
Sometimes insurance can seem both opaque
and expensive. However, when you work with
an experienced and technically skilled insurance
broker, insurance can be straightforward, fairly
predictable, and very helpful.
Next comes the brokering phase. This is where
all the negotiation happens around insurance
coverage, pricing, and higher limits warranties.
The proposed D&O insurance program will be
presented to and discussed with the board of
directors, who will no doubt want to ask your
broker questions about the program. After all,
like the officers of the company, directors face
the possibility of personal liability should the
company fail to perform post-IPO.
The final stage is implementation. This is where
the program is finalized, the warranties are
executed, and subjectivities (carrier-imposed
conditions) are addressed. When the Securities
and Exchange Commission declares a company’s
registration statement effective and a company
prices its IPO, it’s time to contact the company’s
FIGURe 3 D&O Insurance Process for an IPO
• Develop strategy• Implement carrier NDA
• Evaluate-Private company
insurance-International-Cyber-Other insurance
lines
Confidential S-1 (90 Days) Governance Document
S-1A (45 Days)Public S-1 (40
Days)
PricingFirst day of trade
Road Show (20 days)
D&O Insurance Process
IPO Milestones
• Refine limits analysis
• Negotiate with markets
• Preliminary board presentation
• Negotiate coverage & pricing
• Negotiate warranty statements
• Present insurance program
• Finalize program• Execute
warranties• Address
subjectivities• Coordinate
coverage transition
• Bind IPO coverage
• Counseling• Training/ education• Market update• Claims support
Presentation to Bankers (75 days)SEC comments (60 days)
Prepare> Launch> Broker> Implement> Support>
©Woodruff-Sawyer & Co. 2017 (used with permission)
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Woodruff-Sawyer & Co.50 California Street, 12th Floor
San Francisco, California 94111
Tel: +1 415 391 2141
Web: www.wsandco.com
PRIYA CHERIAN HUSKINSPartner and Senior Vice President
email: Phuskins@wsandco.com
Priya Cherian Huskins is a partner at Woodruff-
Sawyer & Co., a full-service insurance
brokerage. She is a recognized expert in D&O
liability risk and its mitigation. In addition
to consulting on D&O insurance matters,
she counsels clients on ways to reduce
their exposure to shareholder lawsuits and
regulatory investigations. Priya is a frequent
speaker on corporate governance and risk
mitigation issues. She is regular lecturer at
director education events such as Stanford’s
Annual Directors’ College. She’s also the author
of the popular D&O Notebook blog.
Priya serves on the board of directors of an S&P
500 public company, a large private company, a
FinTech startup, and a nonprofit. She also serves
on the advisory board of the Stanford Rock
Center for Corporate Governance. Priya began
her career as a corporate and securities attorney
at Wilson Sonsini Goodrich & Rosati (WSGR), one
of Silicon Valley’s leading law firms.
WADE PEDERSONPartner and Senior Vice President
email: Wpederson@wsandco.com
Wade Pederson is a partner at Woodruff-Sawyer
& Co., a full-service insurance brokerage. A
member of Woodruff-Sawyer’s P&C Technology
and Corporate & Executive Protection practices,
Wade specializes in property and casualty and
management liability exposures. Wade plays
a key role in managing client relationships
while working directly with insurance markets
to negotiate and place insurance programs.
The breadth of Wade’s practice allows him
to provide clients with a holistic approach to
insurance coverage. Over Wade’s career he has
worked with companies of all sizes, ranging
from startups to multinational firms, giving him
expertise with companies in all stages of growth
and risk complexities. Wade also works with
a variety of industries, with a particular focus
on the technology, biotechnology, and clean
technology sectors. Clients on the cutting edge
of technological innovation benefit from Wade’s
deep expertise when it comes to assessing and
effectively mitigating business risk through
insurance.