Directors & Officer’s Insurance

D&O insurance protects the company and its executives from certain claims made against them. Shareholders, competitors, investors, etc., can sue a company’s directors and officers, putting their personal assets at stake. Directors and officers (D&O) insurance protects these assets from lawsuits alleging leaders of wrongful acts managing the business.

Who is D&O insurance for?

D&O insurance is typically the best fit for businesses with high liabilities, those that need to attract quality executive leadership, and businesses with a board of directors. Executives, especially high-quality ones, may expect D&O insurance as a prerequisite before they’ll even consider joining your company.

Public and Private Businesses

There are common misconceptions that only public companies should be concerned about the SEC when in reality, recent settlements demonstrate that privately funded companies can face the same consequences.

Venture Backed Companies

D&O is required by almost every institutional investor term sheet. The right D&O program can bolster your funding efforts and make funding rounds run smoother.

Businesses with Large Liabilities

Businesses with Large Liabilities: If a business owes more than $1 million to creditors, then it’s important to have this coverage to protect the business, the directors, and the officers in the event the business goes under. Creditors might point to the company leadership as to the reason they weren’t paid in full.

Why you need D&O Insurance


Summary

Many companies who look for D&O coverage do so because they’re going through an institutional round of funding. What they may not realize is that the policy they’re buying has more utility than just letting you cross an item off your term sheet to-do list. The VC wants you to have this policy in place for two main reasons.

First, if they are going to take an ownership stake and put someone on your board, they’re going to want to be sure that their employee is protected from legal liability. Second, if a dispute develops between you and them, the VC wants to know that you have the capital required to absorb the legal costs without mortgaging the future of the entire company.


Reasons for getting D&O Insurance
To protect acting board members and officers
To defend against allegations
To protect your financials
Increase in SEC Settlements
5.8bn

The aggregate dollar amount of all SEC settlements across these various categories totaled $5.84 billion in 2020, which represents an increase of 61% over the $3.62 billion in equivalent settlements in 2019.

Experience a D&O Loss
25%

Over a quarter of all private companies experienced a D&O-type loss according to a Chubb report. The average total cost for companies without D&O insurance is $394,000 following these types of losses. The highest reported loss clocked in at over $17,000,000.

Event Driven Litigation
59%

Plaintiffs seek to relate the “event” to prior company or board statements of reassurance to shareholders and regulators of no known issues. Of the top 100 US securities fraud settlements ever, 59% are event-driven.

What does D&O Insurance Cover

You will have to consult your policy documents to confirm exactly what coverage your insurance provides but here are a few scenarios of what is covered by directors and officers insurance:


Side A

Protects solely the individual directors by paying the defense costs and settlements levied on the directors as a result of a lawsuit. Side A will only pay the individual directors when the entity is unable (i.e. insolvent) or legally not permitted to do so. Typically, individual directors will ensure that the company purchases additional Side A coverage on top of the traditional ABC coverage.


Side B

Indemnifies the entity after the entity has paid the individuals named in the lawsuit.


Side C

This is entity coverage. Should the entity be named along with the individual directors in a lawsuit, this coverage protects the balance sheet of the company and will reimburse and costs/settlements incurred.

The below graphic illustrates how sides A, B and C work with regards to claims against directors and a securities claims against the company itself:

D&O Insurance Claim Examples

Here are some claim examples that illustrate what Directors & Officers insurance covers

An investment firm bought a fintech company. A short time later they resold the company at a higher price. The angel investors, who have no board seats, are suing the company alleging that the board of directors did not perform sufficient due diligence and undervalued the company. This results in a significant loss for shareholders. The parties settle for $1,400,000.

Students filed a class-action suit against an EdTech startup, alleging that the company’s marketing materials misrepresented the accreditation of the startup’s technology to be used in a college classroom. Damages included expenses for additional classes and loss of income for class participants. Legal defense has already cost the company $500,000.

A ride-sharing company received a complaint from an investor, who alleges that the company improperly induced to issue a note payable to the company. Specifically, he alleges the company intentionally exaggerated its forecasted rate of growth and failed to disclose its tax lien. The company defaulted on the note when it failed to make the required principal and interest payments. The investor agreed to accept the company’s offer to convert promissory note to stock in the company, but the defense costs had already exceeded $500,000.

D&O Insurance 
Frequently Asked Questions

Often clients will come to us and ask us to provide them cost estimates before diving into their company operations, financials, and cap table. The truth is that D&O premiums vary quite significantly, based on companies unique circumstances, however, we are able to provide ballpark ranges based on our experience. There are a few factors that all underwriters will consider:

  • Claims history
  • Funding
  • Industry
  • Revenue & financials

We recently conducted an in-depth analysis of our policy database to provide some D&O benchmarking guidelines. Check out the graphic below which examines average premium by company size (based on annual revenue), to give you a rough idea:

hoosing the right D&O limits for your business depends on a number of factors including, Financials, Shareholders, Industry and Revenue. There is no rule of thumb and appropriate limits will vary on a case by case basis that depend on the combination of factors we’ve outline (and more). Some companies require only $5m and others need up to $50m or even $500m.

Below is an example of how a potential D&O tower could be structured:

Claims that should be covered by other insurance:
Bodily injury / property damage Products liability Pollution Employee benefits and ERISA violations Professional services Contracts Harassment, discrimination, workplace torts Violation of privacy law

Conduct Exclusions:
Any deliberate criminal, dishonest, or fraudulent act should not be covered by insurance and the policies make that clear. Claims involving illegal profits are similarly excluded from coverage. The carrier would have to prove that the act was deliberate if they denied a claim and the insured took them to court. But, if they did prove that the conduct exclusions were triggered, the carrier would want every dollar back that they paid to defend the bad actor. We advocate for language that states that this exclusion isn’t actually triggered it’s irrefutable that the policy really shouldn’t have been defending them in the first place.

Major Shareholder Exclusion
This is usually added by endorsement. It states that if is claim is brought by a shareholder who owns a certain percentage of the company, the D&O policy won’t cover it. Please get in touch to discuss how this may apply to your D&O coverage.

The below graphic illustrates how sides A, B and C work with regards to claims against directors and a securities claims against the company itself:

How it works

Finding insurance coverage doesn’t have to be painful. We aim to make the purchasing experience as streamlined & intuitive as possible.

1
Get a quote

Use our custom built online portal to get quotes fast. We automate clerical tasks that plague the traditional insurance brokerages, giving us more time to be responsive and alert to your company’s needs.

1
Get a quote

Use our custom built online portal to get quotes fast. We automate clerical tasks that plague the traditional insurance brokerages, giving us more time to be responsive and alert to your company’s needs.

2
Pair with a specialist

No two organizations are the same. Our team of coverage experts partners with your team to engineer your risk management strategy, together. We take the time to understand the intricacies of your company to get you the best possible coverage.

2
Pair with a specialist

No two organizations are the same. Our team of coverage experts partners with your team to engineer your risk management strategy, together. We take the time to understand the intricacies of your company to get you the best possible coverage.

3
Stay one step ahead

To do better, you need to know better. With changing political, technological, legal and economic landscapes, staying ahead of the curve is critical.

Our in-house team is tapped into the latest developments of your industry, proactively ensuring you’re covered.

3
Stay one step ahead

To do better, you need to know better. With changing political, technological, legal and economic landscapes, staying ahead of the curve is critical.

Our in-house team is tapped into the latest developments of your industry, proactively ensuring you’re covered.

Latest D&O Insurance Insights


D&O-Pricing-Trends-Feat
March 23 • Directors & OfficersSpotlight

D&O Insurance Pricing Trends 2021

Amid a game-changing pandemic, D&O insurance pricing trends have shifted. Here’s a look back at 2020 and what to expect from 2021.


D&O insurance exclusions
March 5 • Directors & OfficersInsurance Pro Tips

D&O Insurance Exclusions: Red Flags and What to Look out For

Purchasing the right D&O insurance policy means understanding vital details. Here are some “red flags” to watch for when reviewing your plan.


August 8 • Directors & OfficersSpotlight

Directors & Officers Insurance for IPOs

Any company considering an IPO needs an effective Directors & Officers insurance program in place. We break down the pros and cons of IPO's and...