Insurance companies will only insure up to the insurable interest of the insured. This is a basic premise of the insurance industry. I can't insure your home for $100 million for two reasons. First, I don't own your home so I have no insurable interest in it (otherwise I could insure any home on my street and burn it down to collect on the policy). Second, you couldn't even insure your home for that amount because your home is probably not worth $100 million (so you can't possibly loose that much. This could give you an incentive to cause a loss and file a claim). The same principle holds for commercial policies. Management can't insure their Directors beyond the insurable interest of the Directors and the company (i.e. the maximum loss they can sustain). Insurance companies frown on doing this and will ask customers to justify limits that are significantly more than their assets and income. One reason they make exceptions is if a higher limit is required by one of the insured's vendors or customers. Also, the minimum D&O policy limit sold by most carriers is typically $1 million so startups often may have more coverage than they need.
In this case, as I pointed out a requirement might come from the SEC or exchange as a precondition for listing the stock. I'm just not familiar with their requirements. However, if such a requirement exists on the OTCB for penny stocks, it would have to be pretty low or a lot of the companies on the board would have delisted long ago. Premiums are determined by spreading the estimated cost of claims from companies in the same industry with similar profiles across the number of policies the carrier expects to sell, then adding a percent of profit.
Legal fees are typically covered outside the limits of the policy by the insurance company (after all, they're defending their own interest as well). In the case of D&O insurance, the assets and income of the Directors is also taken into account. However, with most startup companies, the Directors aren't typically multi-millionares and if Nevada law protects their personal assets then this would be a moot point anyway.
Another point to keep in mind is that D&O coverage is meant to protect Directors from inadvertant mistakes done in good faith. No insurance policy will protect the insured from their illegal acts if done with full knowledge that they were acting improperly, otherwise they'd be giving an incentive to criminal behavior.
The user group I mentioned operated as a non-profit corporation with a Board of Directors. Again, the premium would depend on the limit of the policy which would be a factor of what the company (or Directors) could possibly loose (you can't squeez blood from a turnip principle) unless a higher limit is required by an outside party.
The question of whether a company can find coverage is a whole different issue. In their present situation, CGFI probably could not. One question insurers always ask the customer is whether they are aware of any situations that could lead to a possible lawsuit againt them. I doubt that they could pass this test. However, if they have had continuous insurance coverage since they were formed, it's probable that they still have a policy.
AI
