Unproven startups carry extra D&O risks

The directors and officers liability market for coverage related to initial public offerings is stable and coverage is adequate, but insurers may take a closer look at IPOs brought under the Jumpstart Our Business Startups Act.

There is a “healthy appetite” among D&O insurers to write IPO coverage, said Steve Boughal, New York-based vice president and chief underwriting officer of Hartford Financial Products, a unit of The Hartford Financial Services Group Inc. “We look at it as new business opportunity.”

However, “the market is cautious on the transition of private to public, and (insurance coverage) typically comes at a higher price than for a company that's been public for a while,” Mr. Boughal said.

Emerging growth companies that file under the JOBS Act “may have a more volatile risk profile” or be perceived as such by underwriters, said Brenda Shelly, New York-based managing director at Marsh L.L.C.'s FINPRO unit.

There might be a more limited appetite for such companies, which do not have a proven revenue stream and whose business model is “a little unclear,” said Kenneth W. Ross, New York-based executive vice president of Willis North America Inc.'s FINEX North America.

In addition, biotechnology companies, which also account for many of the JOBS Act IPOs, may have more difficulty in obtaining coverage because they historically attract more litigation, observers say.