D&O Insurance and Why Your Startup Needs It
Matt Miller, Author, D&O Insurance and Why Your Startup Needs It
Directors & Officers (D&O) insurance is designed to protect companies and their directors and officers from lawsuits that could possibly arise as a result of actions or decisions of their board members and other leaders representing the company. Breach of fiduciary duty, and failure to comply with government regulations are some of the common examples of why companies need a quality D&O policy.
The coverage protects the business itself from these types of claims, as well as the assets of the directors and officers themselves. It’s important to understand that individuals can be held personally liable for their management decisions by government regulators, investors, and shareholders. In essence, D&O coverage allows the leadership of your company to make decisions confidently without fear of personal financial loss.
One of the biggest myths related to D&O insurance is that only large, publicly traded companies need it. This couldn't be farther from the truth. The real truth is that your startup up absolutely needs D&O insurance.
Any company that is growing quickly, taking risks in order to shake up an industry, and is interested in attracting investors should be purchasing D&O. The simple truth is that startups and growing businesses are much more vulnerable than large corporations. While most bigger companies might be able to recover from the costs of a possible liability lawsuit against its leadership, your startup probably will not.
Here are the four key reasons your startup needs D&O insurance:
It is common to see investors request a seat on a startup’s board of directors as a condition of their investment. It’s only natural then, to assume that they probably won’t consider investing in companies without adequate D&O protection.
Private and venture investors usually request that startups buy D&O insurance either before closing a round of financing or within a specified time after closing the deal. The right D&O policy will support and protect the company leaders as well as the board.
Additionally, because investors often disagree with the decisions of your directors and officers, they could decide to hold them personally liable for financial losses. This is where D&O insurance comes in to protect your directors and officers personally.
Attracting Great Leaders
The competition to attract the best directors and officers can be fierce. Attracting the best leaders to your company may be a lot tougher without D&O coverage in place. After all, a role that puts someone at personal financial risk is not as appealing as one that doesn’t, no matter how interesting and promising your services or products appear to be.
With so much responsibility resting on their shoulders, directors and officers can become overwhelmed. Without the protection that a quality insurance policy provides, company leaders can become preoccupied with avoiding the possible adverse consequences of their decisions rather than taking the best course of action for the company. The right D&O insurance can reduce risk and give your directors and officers the support they need to perform at their best.
The best senior managers of startups are always risk-takers. Keeping them and their personal assets protected with D&O insurance enables them to take the necessary risks needed to grow your company and allows them to be aggressive without having to worry about the threat of a lawsuit with every decision they make.
Covering Legal Costs
A 2016 survey performed by leading insurance carrier Chubb shows that more than 25 percent of private companies experienced a claim over a three-year period. Furthermore, the companies that did not buy D&O insurance reported an average loss of nearly $400,000.
Directors and officers carry a great deal of financial responsibility in startups. They make daily decisions about the startup’s operations, and this can expose them to a wide variety of litigation risks. Lawsuits brought against your management can vary, from smaller claims by dissatisfied employees to large, potentially devastating claims by the startup’s shareholders or government agencies.
D&O claims tend to be costly, complicated and can drag on for years. In the event of a claim against your directors and officers, the insurance carrier will not only cover the expenses but also help navigate the lawsuit and negotiate settlements. D&O insurance will also strengthen your cash flow by eliminating the fear that you’ll need a stockpile of cash to combat potential litigation.
Protection Against Bankruptcy
We’ve all seen the statistics about the small success rate of startups and witnessed instances of how one big lawsuit can cripple a young company.
D&O insurance can both protect your company from going bankrupt, but it can also provide protection for your leaders in the case that bankruptcy truly cannot be avoided. In the event of insolvency, the D&O policy will cover the costs of litigation brought by creditors, trustees, or investors, and protect the directors and officers personal assets from the fallout of bankruptcy.
Having quality D&O coverage and an expert who can help you navigate the terms and conditions and the claims process can save you money and, more importantly, time.
If you are involved with a venture-backed startup, having the right broker and an insurance program that’s custom-built for startups can be the difference between success and failure. Running a startup is already an incredibly risky proposition, why make it riskier than it has to be? Buying Directors & Officers coverage will provide you the protection and peace of mind you and your company leadership need to focus your attention entirely on your startup’s growth and success.
About the Author
Matt Miller is the founder and CEO of Embroker, the first modern solution for business insurance. Prior to founding Embroker, he was a Principal at the private equity firm Hellman & Friedman, where he led investments in the insurance and software space.