Questions to Ask
May I see your financial statements?
Insurance underwriters want to be comfortable with a risk before they will write its Directors and Officers (D&O) coverage, so they traditionally turn to the financial statement to quickly learn about a business’ health and operations. Financial statement include a balance sheet, a cash-flow statement, and a profit-and-loss statement.
Was your financial statement reviewed by an outside auditor?
The balance sheet provides a picture of the assets and liabilities of a business, so a report showing a company with few assets and a lot of liabilities would be a red flag for an underwriter. So would indications of a cash-flow problem, or that the decisions by the company’s directors and officers are affecting the value of the company. Since the underwriter gleans so much the information from the financial statement, he or she is much more comfortable knowing an outside auditor has attested to its accuracy.
For a startup company: May I have your business plan and a current statement of your assets and liabilities?
Every company – even a new one – has assets and liabilities and should be able to provide current information on these. The investments in cash and equipment are all assets, while a bank loan is a liability. A startup company should be keeping track of such matters and be able to provide current information on these. Absent an audited financial statement, the startup should provide its business plan, where it shows projected assets, projected revenues and projected expenses based on the research they did. A good plan helps tell the business’ story and demonstrate that this particular management team can take the business to a higher level.
What kind of experience do your officers and board members have in running a private company?
Experience in running a successful business and making difficult business decisions can help predict management’s ability to handle changes in the business climate, while retaining the value that investors and shareholders want to see. It helps to have a list of officers.
Ask an Expert
What’s the difference between private and public D&O?
Private and public D&O policies are very similar; the difference is simply whether the policy holder is a public or private company or organization. Directors and officers of both experience similar risks. They are often industry experts or high-ranking executives, held to high standards by shareholders and held accountable for their decisions. We tend to see public companies fielding more claims than private companies because they have more stakeholders.
How can agents assess the risks private and public companies face?
Although there are many factors, agents should be aware of two key pieces of information used to assess risk:
Financial statements: Financial statements are the ultimate gauge of an organization’s financial health. They reveal how well the board manages its finances as well as the amount of assets—the larger the assets the larger the risk exposure.
Study the industry: Agents should study the industry in which the company operates to recognize risks associated with it.
What are common claims private/public companies need to be wary of?
A common D&O claim we see is infringement of antitrust legislation, which prevents or controls trusts or other monopolies in order to promote competition. Claims can be filed on patent infringement, false advertising, or even slander of another company. Derivative suits are also very common. Essentially a shareholder can file a suite if he/she believes the company’s directors and management are failing to exercise their authority for the benefit of the company and all its shareholders. A derivative suit could be filed when a shareholder believes an incident of fraud, mismanagement, self-dealing and/or dishonesty that is being ignored by officers has occurred. The most common claims typically involve breach of contract or mismanagement of funds.