Importance of D&O coverage for start-ups
In today’s dynamic market place, start-ups are exposed to various types of litigation risks. While there are new opportunities and greater innovation possibilities today, building or growing a business has become competitive and risky. It’s important for every business from a start-up to a well established company to have risk management measures in place. For start-ups, it’s important to be insured against various risks to grow and survive for the long run. A Director’s and Officer’s (D&O) liability insurance needs to be a key component of their corporate insurance portfolio.
As long the start-up company has a leader, the entrepreneur who deals with employees, customers, vendors, investors and government authorities and regulatory bodies, it’s vital to have protection against potential legal risks. This is where Director’s and Officer’s liability insurance role comes into play.
What is a Director’s and Officer’s liability insurance? What does it cover?
Director’s and Officer’s liability insurance protects the business against liabilities that may arise due to ‘wrongful acts’ of the company’s key personnel (directors and officers) while taking managerial decisions that arise in the scope of their job duties. Basically, it secures the personal assets of directors and officers while also protecting the company.
This liability insurance offers complex coverage while covering a wide range of risks. The coverage is offered through three different layers as are mentioned below.
- Side A cover – protects directors’ and officers’ personal assets against lawsuits by providing them with individual cover
- Side B cover – protects the company and its key executives by offering reimbursement of costs incurred by the company while defending claims against its directors and officers.
- Side C cover – protects the entity/company itself from securities claims.
In D&O insurance side A, B, C covers can be structured based on your start-up company’s needs, risk exposure level and business goals. The premium is determined based on the layers and level of coverage chosen. Start-ups can choose their cover based on their business nature and risk exposure. Click here to know more about the risks faced by directors and officers of the organisation.
Why do start-up companies need to buy a Director’s and Officer’s liability Insurance policy?
Executives of newer companies and start-ups are more vulnerable to financial risks. Lawsuits against the company’s decision-makers can arise from many sources such as investors, suppliers, vendors, employees, customers, and even competitors and government agencies. To shield them from these expensive lawsuits, it’s important for start-ups to have the right Director’s and Officer’s liability insurance policy.
Let’s take a look at specific reasons for start-ups to consider investing in Director’s and Officer’s liability insurance.
- Covering for beginners’ mistakes
Beginner founders and new executives are bound to make mistakes. As aspiring entrepreneurs and start-up founders, decision-makers may lack experience which leads to learner’s or beginner’s mistakes. Such mistakes can results in litigations against key executives of the company. For example, unskilled HR officials or officers may neglect employee-reported issues which may lead to employees initiating legal action against them. Directors and officers of the start-up company may also make other mistakes which may make them vulnerable for D&O claims such as impractical promises to investors, failing to comply with even minor rules or regulations etc.
- Protecting Investors’ investments
If the start-up is backed by venture capital funds or receives outside or institutional funding, the investors may insist (in their term sheet) that the company have Director’s and Officer’s liability insurance cover as a protection for their investment. So it may become mandatory for the start-up to have D&O insurance coverage to secure the interest of their investors, this requirement will typically also come from the investors seeking the position of a director in the start-up business.
- Attracting top talent
As an aspiring entrepreneur and start-up founder, having a quality team at the top is extremely important for growth. Top talent in the industry may consider joining the start-ups if there is director’s and officer’s liability insurance policy to secure their personal assets.
- Business growth and longevity
Business expansion is key for any start-up to grow. As the business expands, the company begins to operate under various legal statutes which makes its key personnel vulnerable to a wide range of litigations. However, lawsuits and legal issues that come in the way of success can financially burden and even cripple the company and its key personnel with exorbitant settlements and defence costs. Hence, to thrive and grow, it’s important for start-up business to have D&O cover as a financial security.
- Customer satisfaction
If the start-up company serves B2B (business to business) clients, then many of its customers would insist for having director’s and officer’s liability insurance as a security measure and risk management measure. To scale up the business its important to complete this requirement.
- Bankruptcy and insolvency
It’s difficult for newbies to survive in this highly dynamic, competitive and litigious market environment. Indeed, many start-ups fail each year. Insolvency and bankruptcy of the start-up can put the company’s leaders and the investors’ assets, even personal assets, under threat. Having director’s and officer’s liability insurance assures company and personal assets are secured and the risk is transferred to the insurance company. The policy takes care of the awards and settlements with regards to the claim with defence cost.
Unlike larger companies, start-ups lack in resources and the financial back up to manage claim requirements. Having director’s and officer’s liability insurance cover works like a financial security net during difficult times. Click here to buy the right Director’s and Officer’s liability insurance policy.