There’s a persistent myth in the private business world: D&O insurance is only for public companies.

It isn’t.

That assumption leaves many privately held businesses exposed to claims that can directly impact the company, its leadership, and its balance sheet. Directors and officers liability insurance is designed to protect business leaders when decisions they make in their corporate roles are challenged. For private companies, that exposure is real, active, and often underestimated.

The Numbers Don’t Support the Myth

Directors and officers claims affect private companies far more often than many owners realize. Over a 10-year period, private companies face D&O claims at rates surprisingly close to public companies. Yet a significant portion of the private market still goes uninsured.

Claim severity is also substantial. The average private company D&O claim can cost hundreds of thousands of dollars to resolve, and a meaningful share of claims exceed $1 million. Even when allegations are weak, defense costs alone can become a major financial event.

For privately held businesses, the issue is not whether they are “big enough” to need D&O coverage. The issue is whether they can afford to defend leadership and absorb a serious management liability claim without it.

Who Sues Directors and Officers?

One of the biggest misconceptions about D&O coverage is that claims only come from shareholders. In reality, privately held company leaders can be sued by a wide range of parties.

Investors and Minority Owners

Disputes involving valuation, financial performance, capital raises, dilution, governance, and alleged self-dealing can quickly become claims against directors and officers.

Employees and Former Employees

Employment-related allegations frequently name executives individually, especially where claimants allege discrimination, retaliation, wrongful termination, harassment, or failure of oversight.

Creditors

When a business faces financial pressure, lenders, creditors, and bankruptcy trustees may pursue claims alleging mismanagement, breach of fiduciary duty, or improper financial decisions.

Competitors

Competitor-driven claims are a significant exposure for private companies, especially those involving unfair competition, employee raiding, trade secret allegations, or misuse of confidential information.

Regulators

Private companies can face investigations and enforcement activity from state attorneys general and federal agencies. Even if a matter does not result in formal penalties, the legal costs and executive time involved can be substantial.

Customers and Vendors

Allegations involving misrepresentation, contractual disputes, or unfair business practices can sometimes extend beyond the entity and target individual leadership.

Why the Risk Is Growing

Several trends are increasing D&O exposure for privately owned businesses.

Economic Volatility

Periods of inflation, supply chain disruption, tighter financing, and earnings pressure increase the likelihood of disputes involving management decisions. When companies miss projections, restructure, or enter insolvency scenarios, lawsuits often follow.

Regulatory Change

Shifting regulatory expectations at both the federal and state level create new areas of exposure. Businesses that have never thought of themselves as regulatory targets may still face investigations tied to governance, disclosures, employment matters, or business practices.

Employment Practices Pressure

Workforce-related claims continue to rise in frequency and complexity. Leadership decisions involving hiring, firing, compensation, accommodation, discipline, and workplace conduct are increasingly scrutinized.

Social Inflation and Defense Costs

Aggressive plaintiffs’ counsel, litigation funding, and rising jury awards have pushed claim values higher. Even when a company successfully defends itself, the cost of getting there can be significant.

What D&O Insurance Covers

A private company D&O policy is generally structured around three core coverage parts.

Side A

Protects individual directors and officers when the company cannot indemnify them, such as in insolvency or certain legally prohibited situations.

Side B

Reimburses the company when it indemnifies directors and officers for covered claims.

Side C

Provides entity coverage when the company itself is named in a covered claim.

Many private businesses purchase D&O as part of a broader management liability program that may also include:

• Employment Practices Liability
• Fiduciary Liability
• Crime Coverage
• Cyber Liability

The right structure depends on ownership, governance, financial profile, workforce size, and contractual obligations.

When D&O Becomes a Business Requirement

While private companies are not typically required by statute to carry D&O insurance, market expectations often make it essential.

Investors May Require It

Venture capital firms, private equity groups, lenders, and other capital providers commonly expect D&O coverage as part of a sound governance framework.

Board Members Expect Protection

Independent directors and advisory board members often want to confirm D&O coverage is in place before joining a company. Without it, attracting experienced outside leadership can become more difficult.

M&A Due Diligence Brings It Into Focus

Potential buyers frequently review management liability protections during diligence. Weak or missing D&O coverage can raise concerns about governance and risk management.

The Bottom Line

Privately held companies do not need to be publicly traded to face management liability risk. Leadership decisions can be challenged by investors, employees, creditors, competitors, regulators, and other stakeholders. When that happens, the company and its executives may need to respond quickly and at significant cost.

A well-structured D&O program helps protect both the organization and the individuals making key decisions on its behalf. It also signals to investors, board members, and counterparties that the company takes governance and risk management seriously.

If your business has not reviewed its D&O or broader management liability program recently, now is the time to do it.