Directors and officers insurance is a type of liability insurance that covers the directors and officers of a company against lawsuits alleging a breach of fiduciary duty. A company pays for this coverage so executives can serve confidently as leaders of their organization without fear of personal financial loss.
In essence, D&O insurance is a safeguard for company management that will reimburse settlements and legal defense costs from covered claims.
A D&O policy contains three insuring agreements — commonly referred to as Side A, Side B, and Side C. While this might seem complicated, the three insuring agreements are actually pretty simple:
Side A: Covers individual directors and officers when the company refuses to provide indemnification or is unable to provide it. This is most commonly seen in cases of bankruptcy.
Side B: Will cover companies that make the decision to indemnify their directors and officers. The D&O policy, in this case, will reimburse the company for defense and other related costs. So, with a Side B policy, it is corporate assets and the company itself that is at risk.
Side C: Covers the company itself. If the company is being sued for financial mismanagement, the D&O policy will provide coverage.
The coverage that a company buys will vary and depend on each company’s individual business characteristics and needs.
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While D&O insurance is not an absolute must-have for every single business, it should be strongly considered by businesses and organizations that could be accused of financial mismanagement.
For example, if your business owes millions to creditors, D&O insurance will help protect the leadership and the company in general if it ever goes under. Many times, creditors will want to blame the company’s directors and officers for the business’s inability to pay them back, which is a situation in which D&O insurance would come in very handy.
Also, if a company is looking to attract top-tier executives and leadership to the organization, getting D&O insurance is a good start for that process because a vast majority of top executives will not even consider joining a company that lacks this type of coverage.
Smaller, private companies and startups are often under the incorrect impression that they do not need D&O insurance, believing that their chances of getting hit with a claim are relatively small, but that simply isn’t true. Directors and officers of private companies face some of the same issues as those of public companies, so D&O protection is still important.
Therefore, it can be concluded that any private or public company that has a board of directors should also have D&O insurance. Some of the exposures that directors and officers are most vulnerable to include regulatory actions, misrepresentation allegations, securities litigation, and breaches of fiduciary duties.
D&O insurance fills the gap that general liability and umbrella insurance do not cover when it comes to protecting company board members and executives. Nonprofits should also have it since these types of organizations are managed by a board of directors as well.
Directors and officers insurance is the coverage that is probably most consistently connected to startups, especially startups that have received or are about to receive venture capital funding. Why is this? It’s because most venture capital and private equity firms will insist that a startup gets D&O insurance before they approve the funding round.
They do this because, as investors, they will be joining the startup’s board, so they are basically guaranteeing that the startup will protect them and their assets by having a directors and officers policy in place.
For startups, having a good D&O policy gives them the ability to pay for unanticipated litigation, which can be extremely expensive. Even if you have received funding, your startup still might not have the budget needed to handle these types of legal costs, especially if the claims are complex and take months or years to resolve.
Does that mean that if your startup doesn’t have a board, then it doesn’t need D&O insurance? Absolutely not.
Even if your startup is organized in a different fashion, it can still face the same risks as a VC-funded startup with a board of directors. Remember, you don’t need to have a board of directors in order for your startup’s leadership to be sued for things such as contractual disputes, breach of fiduciary duty, wrongful termination, and a failure to comply with federal and state regulations and laws.
When people hear about lawsuits being filed against company board members, they immediately think of complex schemes, wrongful acts, and criminal activities, but in reality, most claims filed against corporate leaders are related to everyday events.
Hiring and dismissing employees and working with third-party vendors or suppliers are two examples of everyday business activities that most wouldn’t consider risky. However, these are the exact types of activities that result in the majority of D&O claims.
Furthermore, there are other benefits that come with having a preferred D&O policy that aren’t specifically tied to claims and being able to pay for lawsuits.
Having a D&O policy also enables you to attract and hire top talent, especially at the executive level. Top candidates will almost never accept a role at a company that doesn’t have a D&O policy that protects its leadership.
Even if they believe strongly in the company and its mission, a vast majority of corporate leaders do not want to put their personal assets at risk, no matter how attractive the opportunity appears.
As we’ve already mentioned, VCs want your startup to have D&O insurance before committing to funding it because they want to protect their personal assets as future members of your board and leadership. However, there are other reasons why a majority of VCs insist on directors and officers insurance.
The protection that directors and officers insurance provides gives investors guarantees that your business is serious about its growth. D&O claims can be incredibly expensive, and knowing that the startup you’re investing in has coverage and will not be paying legal fees and potential settlements out of pocket shows investors that the company’s leadership is serious about stability and growth.
Of course, venture capital and private equity firms not only ask the companies they invest in to buy D&O insurance, but they also buy it themselves when putting together an insurance program that protects their assets.
In the event of a claim against directors and officers, the insurance carrier will help navigate the lawsuit, negotiate settlements, and cover expenses. Ultimately, this translates into significant time and money savings.
Let’s take a look at some of the most common types of D&O claims and the areas from which they arise:
Regulatory Issues
All businesses run the risk of being fined by governmental regulatory bodies if they do not conduct their activities in a lawful manner. Directors and officers can face claims from these types of bodies related to consumer protection, workplace health and safety, taxation, environmental, securities, and corporate law.
If these regulatory bodies uncover wrongful conduct on the part of company management, legal actions against both the company and its executives can be taken.
Competition
Today’s business world, especially when we are talking about the world of high-growth startups, is extremely competitive, with all companies looking to find any advantage they can. This can sometimes lead to business practices that might not be entirely lawful. Your company and executives can be sued for things such as collusion, breaches of intellectual property, misappropriation of trade secrets, and a variety of other anti-competitive and possibly illegal behavior.
Remember that even if your company wins the case, these types of claims tend to be incredibly complex and long-lasting, meaning that your legal expenses can be great even if the court proves that you did nothing wrong.
Employee Lawsuits
Employment-related claims are definitely one of the most common types of D&O claims. Employees will often reach out to management if they feel that they are not being treated fairly or if they are being mistreated in any way. If the employee believes that management did not address their concerns sufficiently, there’s a good chance that they will file a lawsuit against the company and its management.
Employee practice claims are usually handled by an EPL insurance policy, but if the lawsuit is directed specifically at the directors and officers, a D&O policy will be needed to protect management’s personal assets in the lawsuit.
That’s why EPLI, D&O, and several other policies are often bundled together to create what is called a management liability insurance program that aims at specifically protecting corporate leaders and their assets from a variety of possible claims.
Common employment practice claims against directors and officers include discrimination, harassment, breach of employment contract, failure to address safety or health concerns, wrongful termination, and improper hiring processes.
Shareholders
Shareholders, especially those with large stakes in the company, will often monitor and analyze every move that the company’s executives make. If they believe that what executives are doing with the company doesn’t have their best interests in mind, shareholders might file claims against company management.
Large amounts of money are often involved, and shareholders will do anything they can to make sure that their investment is being protected. If they are not happy with the current direction of the company, shareholders are likely to file claims against the people who they believe are responsible.
D&O insurance can also protect executives and board members in the unfortunate case of bankruptcy. The D&O policy will provide indemnification, acting as a buffer between the personal assets of the directors and officers and the legal costs spent defending litigation brought by creditors, trustees, or past investors.
Several factors influence the cost of your Tech E&OCyber insurance premium, including:
For startups looking to buy Directors and Officers liability insurance (as well as EPLI and Fiduciary Liability Insurance), here’s rough guidance on limits, retention, and premium when purchasing through the one-of-a-kind Embroker Startup Package:
| Funding | Limits | Retention | Premium |
| $0 – 10M | $1 – 2M | $10 – 25k | $3.5 – 6k |
| $10 – 25M | $2 – 3M | $10 – 50k | $5 – 10k |
| $25 – 50M | $3 – 5M | $25 – 50k | $7.5 – 15k |
| $50 – 100M | $5 – 8M | $25 – 75k | $10 – 15k |
| $100 – 250M | $8 – 10M | $25 – 75k | $20 – 40k |
Further reading on D&O insurance costs.
Now that you know what D&O insurance is, what it covers, and why companies need the coverage, let’s take a look at how to actually use the insurance policy. In the scenario below, we will break down each step in making a D&O insurance claim.
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Directors and officers insurance protects your company’s management should they be personally exposed to liability claims for the business decisions and actions they made while running the business.
