Directors & Officers Insurance, or “D&O,” falls under the “management liability” category of business insurance along with EPLI. The two are usually paired together in one complete policy. Here’s what you need to know about D&O.
What is Directors and Officers Insurance?
Directors and Officers Insurance protects corporations and their individual directors and officers from claims brought based on any director or officer’s actions or decisions when acting in his or her capacity as a director or officer. This can include claims for breach of contract, wrongful interference with a contract, consumer protection violation, mismanagement and breach of fiduciary duty, securities fraud in connection with private placements, failure to comply with regulations/laws, and more.
While coverage varies from policy to policy, Directors and Officers Insurance always covers board members and execs and offers protection of their personal assets. D&O can also protect the corporation itself in addition to a specified member of the board of directors by reimbursing the corporation after indemnifying a Director/Officer. Most of the insurers we work with also extend D&O policies to protect employees and volunteers outside the board of directors, including external advisors, scientific advisory boards, and employed lawyers.
Generally, D&O will cover the costs of any litigation or settlement action brought against any director. This includes law suits from the company’s shareholders (“derivative suits”), customers, or vendors. Coverage can also have inclusions for regulatory agency investigations and even criminal prosecutions.
Why do I need it?
Most companies need D&O coverage because they’re going through an institutional round of funding. As soon as you have VCs on your cap table (likely after your first big Seed or Series A round), you’ll need D&O. A Directors and Officers Insurance requirement is basically a “boilerplate” provision in any VC term sheet these days.
Though it may be a standard term, VCs require D&O for good reasons. First, startups are incredibly agile and not very risk-averse, meaning that directors/officers have to make decisions extremely quickly without necessarily evaluating all potential risks. Second, sometimes it takes a little bit of time to lock in the core team, and sometimes this happens because one director/officer turns out to be a “loose cannon.” Either way, the potential for D&O liability is inherently greater for startups. And keep in mind, while your investors may be getting this insurance to cover their own butts, a D&O policy also protects the company itself. It’s a double win!
Even if it’s not currently required, you may want to get a D&O policy for your company for another important reason: to attract new managerial talent. You’re much more likely to recruit an industry leader as a board member or officer when he or she knows that he or she is able to make important decisions without facing a personal lawsuit.
Finally, here’s why you really need Directors and Officers insurance: the cost of not having coverage can literally be a killer for a startup. The average loss by companies experiencing a D&O lawsuit was $697,902 in 2013!
How do I protect my company and myself?
Want to read more on the subject? Check out our blog posts on Directors and Officers Insurance.
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