By Matthew Studley

Despite economic distress and a global pandemic, 2020 brought an unprecedented 480 initial public offerings (IPOs) to the U.S. stock market, more than doubling the number from the previous year.1 In Canada, there were 77 IPOs that completed on four Canadian exchanges.2

From a risk perspective, an IPO marks the end of one company and the birth of a new one. All too often, directors and officers of both entities are unaware of the new level of risk they face and are confident they’re covered against claims, in any case.

That overconfidence might be based on past experience: Many long-time directors have gone their entire careers without a hint of litigation or other risk. However, D&O claims are not uncommon, and just because a director has avoided claims for decades doesn’t mean it can’t happen, especially in light of an IPO, when far more interested parties will be watching the firm and its directors and officers.

Costs for claims often run in the tens of millions of dollars, including a significant portion for legal representation, and can take years to settle.

Take steps to fill the gaps

If your private company is taking steps toward an IPO, your business process may have to change as you are taking on new risks. To help protect directors and officers, follow these steps to help fill the gaps left by traditional insurance coverage when going public:

  1. Review your existing insurance program. Private companies run the gamut from start-ups to established, multimillion-dollar enterprises. While larger companies may already have appropriate D&O insurance in place, some smaller ones may not. It’s essential to understand the insurance already in place to determine gaps in coverage. This is especially important in regards to any public statements made on the prospectus as the company approaches its IPO and after the IPO in regards to company performance.
  2. Determine your insurance limits sufficiency. Work with your broker to understand the different legal requirements for a public corporation, compared with those of a private business. Learn more about appropriate coverage for public corporations and make sure you’re in line and can make an educated decision.
  3. Plan for D&O coverage. Unlike many private companies, the founder and other shareholders at a public operation may not be involved in direct management. This means your protection must change. A new D&O policy must cover the risk for the public company, while the old policy covers the historical liability pre-IPO. There must be a separation between the two contracts.
  4. Understand the type of policy you need. Private D&O coverage offers broad entity coverage to protect the corporation while public D&O coverage can become much more restrictive and expensive due to the increase in stakeholders, from shareholders to regulators to customers. For example, public D&O coverage may be triggered only to protect individual directors and officers, or protect the company along with the individuals. It is worthwhile to negotiate or consider broader coverage, especially when it comes to employment practices liability (EPLI) coverage, corporate protection or other excluded areas.
  5. Arrange for roadshow coverage. One area often overlooked is the IPO roadshow, in which directors make presentations to raise demand from institutional investors. These presentations are made when the company is still private, but the roadshow may be specifically excluded from your existing D&O policy — and any litigation stemming from misrepresentations made during presentations may not be covered. This gap in coverage should be addressed on your private insurance policy, since it happens before the company goes public.

Transitioning from a private to a public company is a big change, but it doesn’t mean you need to leave yourself at risk. Work with your broker to ensure you secure appropriate coverage.

Contact your HUB broker to discuss what you need to know about D&O insurance coverage for your company before going public.

1StockAnalysis.com, “2020 IPOs,” accessed March 22, 2021.

2CPE Analytics, “2020 Canadian IPO mixed results - number (77) down, amount ($5.55B) up driven by PE-backed IPOs,” January 5, 2021.