Public Policy

Avoid a pre-IPO disaster by getting the right financial insurance.
Magazine Contributor
3 min read

This story appears in the January 2001 issue of Entrepreneur. Subscribe »

Getting ready to take your company public? Then you've probably got a lot on your mind, but have you thought about what could happen to your IPO if some problem within your organization leads to a lawsuit and you don't have the appropriate insurance in place to protect your assets?

Having a solid financial insurance portfolio in place well in advance of your IPO filing can make the difference between a successful leap to publicly held status and the ignominious ruin of all you've worked for, says James R. Lopiccolo of MDM Financial Risk Insurance Brokers in Los Angeles. You need to be certain you won't sustain an economically devastating uninsured loss as you move forward with your IPO, and standard commercial general liability policies may leave critical gaps in your coverage.

Lopiccolo says your financial insurance portfolio should contain three essential types of coverage:

Technology professional liability/errors and omissions (E&O). Depending on your specific business and needs, Lopiccolo says your E&O exposure will likely fall into the following areas: financial loss by a customer or other third party arising from errors and omissions in your performance, personal injury and intellectual property infringement arising from your products or media content, and virus and unauthorized-access liability related to breaches in your network security. Insurance carriers have developed a number of products to protect against these types of losses, particularly for technology companies.

Directors and officers liability (D&O). Experienced officers and outside board members will play an important role in your ability to attract venture capital for pre-IPO growth, but Lopiccolo notes that these indi-viduals typically require protection for their personal assets in case they are sued in their capacity as director or officer. D&O insurance allows you to provide for their concerns without having to risk the assets of the company.

Employment practices liability (EPL). Lopiccolo says industry trends show a large percentage of claims against directors and officers are related to employment-practices violations, such as wrongful termination, discrimination and sexual harassment. These types of claims can occur at any time, especially in rapidly growing companies, and can be costly.

Technology companies may have some special insurance needs in these areas and may find fewer insurers offering appropriate coverage, Lopiccolo says. Volatile stock price valuations and resulting fluctuations in market capitalization are the primary characteristics that trigger securities class action lawsuits against technology firms, notes Lopiccolo. This factor affects the terms, conditions and pricing of D&O coverage for high-tech IPOs. Other influences include the rise in the number of class action securities lawsuits and their ultimate settlement values, and the fact that high-tech companies continue to be the most frequently sued of all industry classes.

If you fail to address your E&O, D&O and EPL exposures with adequate insurance, you risk having to state uninsured liabilities on your balance sheet, which could seriously damage your IPO launch. Acquiring protection isn't just a preventive measure: Having a solid financial insurance portfolio will assist with your efforts to raise capital, explains Lopiccolo.

Also remember that the structure of your insurance will be slightly different when you go from being a privately held to a publicly held company. To ensure that the appropriate coverage is ready to kick in as soon as you launch your IPO, Lopiccolo advises choosing an insurance broker with experience in taking companies public.

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