Directors and Officers Liability Insurance

Many of the people believe and advocate that Directors and Officers liability insurance is necessary only for large enterprises but today, small and medium businesses have started including this policy in their risk management portfolio. Every business, whether it is large or small can make mistakes and hence it needs a quick and reliable recovery plan. The Directors and Officers liability policy provides a rapid recovery plan for the company’s top executives. As a Director, you’re ultimately responsible for the decisions you’ve made and it is important for small organizations to provide a protective shield against lawsuits.

If you are operating a small or medium business and have no plans to avail directors and officers liability insurance then take a look at the following advantages of having this policy:

1. SMEs are easy targets for lawsuits

SMEs do not invest much in hiring in-house legal representatives as they run on a tight budget, so it becomes crucial for every SME to buy this policy in order to be prepared for any lawsuits arising against management or Directors. A D&O liability policy covers executives, managers and the board of directors of your company against negligence claims and errors & omission claims. Any employee, client or shareholder may sue you against wrongful acts like misuse of the company’s funds or breach of contract etc. and such cases put a severe strain because of hefty costs of litigation. A large organization recovers from such mishaps but being a small or medium enterprise, it is very difficult to regain your financial stability after incurring high expenses in litigations and court proceedings.

Additional Read: How directors and officers liability help companies in distressed times

2. Helps in attracting good talent

Every business strives to hire good talent and if an organization has a D & O liability policy it becomes much easier to acquire quality talent from the marketplace. Successful and knowledgeable people feel confident and interested in an SME if they will be able to take their decisions without facing personal lawsuits. This policy safeguards the personal assets of the officers and directors and instils confidence among would-be senior employees.

3. Helps in getting investors

Investors today require that every business should have a directors and officers liability policy, no matter if it is small or large. It decreases the magnitude of risk for investors. The D&O policy helps in raising capital through crowdfunding or venture capital. Investors ask for this protection if they are interested in your company. Hence in order to attract investments for your company, it is important to buy directors and officers liability policy.

4. Provides financial protection against negligence

A Directors and Officers policy helps save SMEs from reputational crisis and lawsuits. It offers a financial cushion by covering for the defence cost. As a director or manager, making a decision for the betterment of the organization might backfire and make you personally liable for the loss. In such cases, D&O policy is the last resort for you. For an SME, such instances can endanger your organization because claims are costly. It is always advisable to maintain an optimum level of D&O cover to face mishaps like unrealistic promises to investors, negligence, error or omission etc.

5. Improves your credibility in the market

Having a D&O policy enhances your organization’s goodwill and brand value as your organization is an entity accountable to safeguard the interest of its board of directors. It is a growing need to buy this policy in order to deal with contingencies more confidently. Investors, clients, and your employees play a key role in your organization and directors policy has a very high aspirational value for all of them in terms of financial stability. Having directors and officers insurance policy is a beneficial proposition in cases of mergers and acquisition as it increases the credibility of the firm even at such times or during contingencies.

Additional Read: Who is covered under Directors and Officers (D&O) Liability Insurance?

Case Study:

XYZ textiles limited is a small enterprise. This firm recently faced a lawsuit pertaining to breach of duty. One of its clients sued them for not delivering their order on time. As an SME, it put a great strain on the organization to fight legal court proceedings. The hefty cost of litigation became a huge financial burden on the firm. It also affected the reputation of the firm negatively. The firm had not taken a D&O policy and this made them vulnerable as there was no recovery plan to regain their financial stability. The firm had ignored the importance of D&O policy due to which they had to face a financial crisis.

Having a D&O policy is a smart practice for SMEs and it should not be ignored. It offers solutions that cater to your business needs like attracting market talent and prepares you to scale up to fight against mishaps. Every business, whether it is small or big, should buy this policy. Even a start-up should acquire it because of the D&O policy’s beneficial value.

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