THERE IS often a misconception among directors and offices of privately held companies that they are somewhat insulated from D&O litigation because they are not as visible as their counterparts in publicly-owned companies are. But based on recent surveys and court decisions, the likelihood of a director or officer of a privately held corporation being sued has increased substantially. Widespread media coverage of employment-related litigation, increased merger and acquisition activity, a still uncertain economy and regulators' enhanced scrutiny are among the reasons for the heightened exposures directors and officers face.

The most important reason for directors and officers of private corporations to buy D&O liability insurance is to protect their own assets, since they can be held personally liable for their wrongful acts committed on behalf of the corporation. In most instances, a corporation is obligated to indemnify its directors and officers for costs associated with such litigation, subject to a few important exceptions. When determining a corporation's responsibility to indemnify, one must review the company's bylaws and the state's indemnification statute.

A company's financial ability to indemnify should also be considered. A rash of bankruptcy filings over the last three years — some high-profile in nature — has led to conflicting decisions concerning who has jurisdiction of a bankrupt corporation's assets and has raised questions about indemnification of directors and officers in such cases. Unfortunately, it could be years before the courts hammer out a final position on this issue.