A private matter: private business owners often overlook the need for directors and officers coverage. (Selling Insight).

Fact: Large, public companies are sued regularly and make national headlines for paying large court awards or out-of-court settlements. Directors and officers coverage for the 13,000 or so public companies in the United States is an assumed cost of doing business.

Fact: According to the U.S. Census Bureau, there are three million to five million privately held companies in the country. Though they do not make national headlines, private companies are sued daily--often for events not covered by their policies for general liability, employment practices or fiduciary liability.

The difference: A publicly held company has the capacity to absorb the costs and consequences of most litigation. The majority of private companies can ill afford even the cost of defending against such a lawsuit and may suffer disastrous consequences from litigation.

Take these recent examples from claim files:

* Principals in various limited partnerships have sued the controlling interest in the partnerships, claiming breach of fiduciary duty, fraud, misrepresentation and other allegations. The partnerships had been set up as investment vehicles, and the risky investment targets were substantially devalued when the Internet "bubble" burst. Investors allege they were deceived as to how their money would be invested. Defense expenses thus far total $3 million, and alleged damages are estimated in excess of $20 million.

* In a suit against a private company, an insured person has been sued personally for breach of contract. The person allegedly misrepresented the true nature of the contractual relationship and is alleged not to be entitled to protection under the corporate entity. Since the contract was with the entity, the individual had hoped to be quickly dismissed from the lawsuit. Unfortunately, the matter shifted to bankruptcy court, which has not yet removed the person from the suit. Defense costs to date exceed $250,000.

* Two small entities merged, and shareholders allege they never received shares to which they were entitled. The lawsuit further alleges misrepresentation, breach of fiduciary. duty, civil conspiracy economic coercion and shareholder oppression. Defense costs currently exceed $50,000.

While private business owners make sure their enterprises are adequately covered for most perils, many believe that a privately held company can somehow fly beneath the radar screen in today's litigious society. Private D&O coverage is often overlooked or ignored.

Increasingly over the past five years, however, private companies have purchased stand-alone coverage for employment practices liability--a growing concern among employers. According to the Tillinghast-Towers Perrin 2002 D&O liability survey, approximately 56% of claims against private D&O policies are employment-related. Today EPL exposure is so substantial that most companies consider it a core insurance purchase. What company owners may not realize is that private D&O coverage nearly always encompasses EPL coverage at relatively little extra cost.

Other benefits for companies purchasing private D&O:

* Unlike public D&O, private coverage enhancements remain widely available. Clients may tailor stand-alone coverage or purchase specialty package policies, which include coverages for D&O, EPL, crime, fiduciary liability, even errors and omissions and kidnap and ransom, often at additional savings if purchased under one aggregate limit.

* Private D&O is usually written on a duty-to-defend basis. This is particularly significant for non-EPL claims, such as fraud in conjunction with a breach-of-contract claim, which might not otherwise be covered.

* Having an experienced insurance company, with expert outside counsel, defend a small to mid-sized company against lawsuits significantly reduces the economic and emotional drain on the firm and its principals.

* Private D&O may be the only coverage that responds to protect directors, officers and often other employees of the company from personal liability in a lawsuit. Being incorporated or designated a limited liability corporation does not necessarily protect the business owners or employees. Without private D&O coverage, they might have to pay for and direct their own defense and satisfy any settlements or judgments out of their own pockets.

* Private D&O also covers the entity itself for any act, error or omission. The Tillinghast-Towers Perrin survey noted that corporate entities were in 88% of all suits brought against directors and officers.

Private business owners need to know the exposures--who may sue and what types of claims may be brought. And they need to know the risks to themselves personally and to their company.

The message to clients: The benefits of private D&O coverage are innumerable. The price is affordable. And the consequences, if the coverage is not purchased, may simply be unacceptable.

Jeffrey P. Klenk is senior vice president, Executive Liability, Travelers Bond. He can be reached at [e-mail].