Fred C Church

The JOBS Act may have had unforeseen consequences for directors and officers liability insurance, leaving small businesses in an uncertain position.

The law authorized crowd funding, reduced disclosure and reporting requirements for the first five years of operating a company with under $1 billion in annual revenues and relaxed limitations on private fundraising. The result is that analysts are uncertain how insurers will see the situation, Business Insurance reports. Reduced disclosure requirements could cause higher or lower perceptions of risk, leading to opposite effects on business liability insurance rates.

Other questions revolve around Rule 144A of the Securities Act of 1933. Increasing the scope of permissible private funding mechanisms means that companies must check their directors and officers insurance. It will be important to understand the limits of D&O coverage before exploring the new funding options, and that may require clarification from the insurance provider.

Looking ahead to future developments
Analysts say that many of their questions will remain unanswered until the Securities and Exchange Commission issues new guidance, which may take some time. For now, the importance of consulting certified insurance counselors or other experts when evaluating D&O needs and options will be exceptional.

Experts say that the language in D&O policies can differ a great deal when it comes to exclusions and limitations. Because of the variations, it may be difficult to assess policies effectively. These issues will apply mainly to small companies that utilize provisions of the JOBS Act, so many may find they are not heavily affected despite the potential for confusion.