Insurance guideline requirements for a company before an IPO

Insurance guideline requirements for a company before an IPO

• Directors and Officers insurance

When going public companies can expect to pay significantly more for D&O insurance since there is a potential for an increase in the frequency of claims after an IPO.

The D&O coverage is generally written to provide broader coverage post-IPO. Since the risk of securities claims is so much greater for public companies, Side C coverage will specifically cover those risks.

Three of the basic insuring agreements commonly associated with D&O coverage for an IPO:

1. Side A: Protecting the personal assets of your directors and officers by covering the losses of your leaders that result from claims for which the company does not indemnify them.
2. Side B: Protecting the company against losses resulting from the company indemnifying an officer or director for claims that were made against them
3. Side C: Protecting the company against losses resulting from securities claims made directly against the company\

Directors & Officers Liability

Managers of an enterprise are exposed to considerable risks. That exposure extends to the company’s capital and potentially personal assets. Managers can be held personally liable for improper action, even if mistakes were not made by another person on the team.

What are the coverage terms?

The policy terms are the most critical components to a public company’s D&O insurance program placement. Maximizing coverage in the event of a claim is rooted in contract certainty and broadest and best-in-class terms and conditions. Experienced D&O practitioners can protect from debilitating coverage gaps and exclusions. It takes an IPO-experienced and detail-oriented brokerage tactician to obtain critical coverage enhancements. Coverage topics such as straddle claims, definition of loss and D&O exclusions can be the difference between maximizing policy proceeds and an outright claim denial.

What is the policy structure?

Public company D&O insurance can be markedly different in structure than private company D&O insurance. Two very common examples include the separation of limits and the addition of dedicated Side A difference in conditions (“DIC”) insurance. There are structural considerations, such as entity investigative coverage, the inclusion of DIC limits within the “A/B/C” tower and the decision to run-off prior coverage or maintain continuity of a program.

What are the limits?

Limits selection can be influenced by various factors, including: expected offering size, market cap, industry risk factors, historical claims activity, merger & acquisition exposure, bankruptcy risk, a company’s risk retention capacity, limits availability relative to budget and board directives. 

What is the pricing?

IPO candidates should prepare senior management and the board to anticipate a meaningful change as compared with the private company program with regard to D&O premium. Candidates should also work closely with their broker to align strategies to maximize the return on this premium. These strategies can include meetings with key national decision-makers at leading D&O insurers, risk and retention analyses.

What are the international considerations?

In many countries, non-admitted insurance is problematic and would not be permitted to respond in the event of a claim in such a country. All companies, particularly IPO candidates, should consider their international exposures and implement locally admitted policies as needed.

• Initial public offering (IPO) insurance

A company can purchase IPO insurance to insure itself against the risks associated with its initial public offering. A number of liability risks arise while working with a financial institution in the issuance of shares, there can be a mistake in the prospectus, warranties, mismanagement, or incorrect information was dispersed during the road shows. In the worst case the resulting claims can jeopardize the continuity of the enterprise. 

• Employment practices liability (EPL)

Employment Practices Liability-insurance (EPL) covers the claims and legal defense costs for the delicate matters. The damage amounts can be so high that they can endanger the continuity of an organization. A claim from an employee based on sexual harassment, age discrimination or the termination of an employment contract. Companies in the United States and Europe have noticed an enormous increase in these types of claims. 

• Fraud insurance

In the financial world everything revolves around trust. This trust can be betrayed by a dishonest employee or customer. Managers, accountants or advisors are capable of committing fraud. Fraud damages the trust in relationships; in the worst case it jeopardizes the continuity of your enterprise. Fraud Insurance covers the financial damages resulting from fraud committed by employees or third parties to ensure the continuation of the enterprise. Fraud consists of dishonesty, forgery, theft or embezzlement. 

• Fiduciary liability

As a company grows and the employee benefits become more complex, it is important to have coverage against errors and allegations of mismanagement related to administering and managing employee benefit plans.

• Cyber liability insurance

A public company experiences more public scrutiny, which can lead to more claims. Public companies have a higher chance of being targeted by hackers and cybercriminals. 

What are other mandatory business insurance policies for companies?

• Workers’ compensation insurance

Every state has its own requirement for workers’ compensation. It’s mandatory for every state.

• Unemployment Insurance

A joint state-federal program that provides cash benefits to eligible workers, unemployment insurance is administered by each state, but states follow the guidelines that are established by federal law. Each state’s unemployment insurance program is funded by the taxes paid by companies operating in that state. A business pays for unemployment insurance with money that is submitted through payroll taxes.

• Health Insurance

The rules and regulations are changing with health care. According to the Affordable Care Act (ACA), businesses with 100 or more employees must offer health insurance or coverage. The offered insurance must meet the minimum essential coverage requirement, a once a year determination. 

• Disability Insurance

Disability Insurance coverage allows employers to provide partial wage replacement insurance coverage to their eligible employees for non-work-related sickness or insurance.  Certain states require employers to purchase disability insurance.