Start-ups these days grow so rapidly that it’s difficult for them to correct course once they recognize missteps. At the incubation stage, start-ups usually ignore Directors and Officers Liability Insurance because of the misconception that this policy is required when an organization operates on a very large scale. But the consequences of non-compliance, breach of duty etc. can be a levy of punitive fines on start-ups.
This policy definitely helps in brightening the chances of success and survival of start-ups. There is a general lack of trust when it comes to investment in start-ups. Directors and Officers Liability (D&O) Insurance is an important requisite as investors usually place the condition of having Directors and Officers liability insurance policy for funding your company. It is crucial to buy this policy as it is a core consideration of investors while providing funds to start-ups so it helps in getting the capital amount. This policy also helps in the recruitment of best market people for top-level management as it safeguards the personal assets of officers and directors.
Spending money on litigation invites financial crisis and usually, start-ups do not have deep pockets. The failure can be avoided if due diligence is carried out at the incubation stage itself. It is advisable to consider this policy at the incubation stage as it will safeguard your business from day one. It will motivate investors and industry best people to be the part of the start-up which ultimately formulates a strong foundation.
Directors and Officers make the better decision when they have a sense of security of not facing a personal lawsuit. Start-ups are highly risky so it is critical to managing insurance portfolio to decrease the magnitude of risk and safeguard your directors and officers against lawsuits such as deceptive advertisements, breach of fiduciary duty etc. filed by employees, shareholders and competitors.
Directors and Officers litigation risks are faced by the public, private, start-ups and non-profit companies. Start-ups should invest in this policy at an early stage in order to get coverage from inception. Any wrongful business decision which affects your business reputation and invites litigation cost can be handled critically by the insurance company so it is crucial to buy D&O Liability Policy.
BZ Tech Ltd. is a new technology start-up. The start-up has not availed Directors and Officers Liability insurance. Later the organization has been sued by investors, the reason being unrealistic promises made to investors about revenue. Investors sued directors and top-level management for not operating ethically and they put a demand of Rs. 1 Crore.
Now as a new start-up, BZ Tech Ltd. anyhow would not be able to pay the compensation amount and they have to fight the case in court to defend themselves which ultimately add on to the cost burden. In such case, if they would have availed this policy, the insurance company would have protected all personal assets of Directors and Officers and fostered financial stability at the time of contingencies.
It would have indemnified directors and officers of the company for the legal costs, damages and expenses incurred, arising from claims brought against them personally – for acts in their executive capacity.
This policy helps in attracting investors, capital, and key knowledgeable professionals and enhance your business reputation. Immune your organization’s director and top management from unexpected litigation or liability by availing Directors and Officers liability.
Also See: Quick Guide to D&O Insurance Policy