By Steven P. Gibson, Dealer Risk Services, Inc.
Most Dealers believe Directors and Officers coverage is only necessary for publicly-traded entities. Because the predominance of Dealerships are privately owned, they feel there is little or no exposure to Management Liability claims.
However, private companies risk suits from competitors, governmental bodies, creditors, and even shareholders. Owners, Board Members, and Senior Management may find themselves embroiled in litigation without insurance coverage. These situations are expensive both in time and legal fees.
Let’s look at two examples of litigation that can result from the proposed sale of a Dealership.
First, a transaction that did not finalize.
Dealership transactions all begin with a tremendous sense of optimism. Terms are negotiated by Counsel, approvals requested from Manufacturers, and closing dates are set.
Yet, inevitably, something always seems to change on the way to the closing table. Sometimes, it is an inventory valuation that comes into question, causing a disagreement on a relatively small dollar amount to grow into a major issue that endangers the entire transaction.
Both parties can get really sensitive about small issues, we’ve all seen it happen. Even the most well-planned transaction can collapse minutes before the documents are to be signed.
But, it’s what happens months after the sale has fallen apart that can cause financial pain.
Transactions that fail can lead to more than damaged egos and hard feelings. Often, they lead to lawsuits. When this occurs, the suit will name not only the purchasing entity, but, also the Dealer principal and other officers.
Unfortunately, Management Liability claims involving contract disputes are not covered under the Garage policy. Dealer principals and Officers are left to fund their defense and are exposed to any judgements doled out by the courts.
A Directors and Officers insurance policy can provide a solution that is very inclusive.
Second, let’s examine a transaction that involves multiple interested parties, such as an estate or an entity with minority stockholders.
Certainly, the death of a Dealer principal can bring rise to disputes between heirs during the sale transaction. This can especially be true if one of the heirs is actively involved in the Dealership.
Disputes over the final valuation made by the majority heirs can result in legal disputes that can either disrupt the timeline on the sale or ruin it altogether.
The same can be true with General Managers, CEOs or CFOs who have a minority share of the Dealership. It was an excellent strategy to use stock ownership as a “golden handcuff’’ tool to entice talented personnel. But, when the sale of a Dealership threatens to disrupt the livelihood of a minority partner GM deeply involved in the community, a dispute over the valuation can easily ensue.
There is no coverage afforded inside the Garage Liability policy for such disputes. Not for Defense of suit and certainly not for any indemnity.
We would again look to a well-crafted D & O policy that deletes the Insured vs. Insured exclusion and would defend and indemnify the majority stockholders.
Invest a little time to analyze and discuss this coverage. Consider trading some premium dollars for insurance that can save you thousands. Who needs D & O Coverage…You Do!
Steven P. Gibson is the President of Dealer Risk Services, Inc., a Florida-based firm that provides insurance expertise to the Automotive Industry. He can be reached atsgibson@dealerriskservices.com and 321-733-6253.
