Start-ups grow so rapidly that it’s often difficult for them to correct course if they commit any mistakes. At their incubation and early start stage, start-ups usually ignore Directors and Officers Liability Insurance because of the misconception that this policy is required only for an organization on a large scale. But instances of non-compliance, breach of duty etc. can result in a levy of punitive fines on start-ups as well.
A D&O policy definitely helps in improving the chances of survival and success of any start-up. There is often a general lack of trust when it comes to making an investment in start-ups. A Directors and Officers Liability (D&O) Insurance helps here. It is an important pre-requisite, as investors usually place a condition of having this insurance policy in place before funding your company. It is crucial to buy this policy as this is a core consideration for investors providing funds to start-ups, and it helps you in getting capital from them. This policy also helps in the recruitment of best talent for top-level management as it safeguards the personal assets of officers and directors.
Spending money on litigation can create financial crises and usually start-ups do not have deep enough pockets to manage these well. Failure can be avoided if due diligence is carried out at the incubation stage itself. It is advisable to consider a directors and officers liability policy at this stage as it helps to safeguard your business from day one.This will motivate investors and your industry’s best people to be a part of your start-up. This helps to create a strong foundation for the start-up.
Directors and Officers make better decisions when they have a sense of security from not having to face personal lawsuits. Start-ups are highly risky so it is critical to manage an insurance portfolio to decrease the magnitude of risk and safeguard your management. Typically this would protect against lawsuits alleging deceptive advertisements, breach of fiduciary duty etc. filed by employees, shareholders or competitors among others.
Directors and Officers litigation risks are faced by public, private, start-ups and non-profit companies. Start-ups should invest in this policy early in order to get proper coverage right from their inception. Any incorrect business decision which affects your business reputation and invites litigation costs can be handled by the insurance company so it is crucial to buy D&O Liability Policy.
Case Study on Directors and Officers Liability Insurance:
BZ Tech Ltd. is a new technology start-up. The start-up has not invested in a Directors and Officers Liability insurance. However soon after inception the organization is sued by its investors, due to several unrealistic promises made to them about projected revenues. Investors have sued the directors and top-level management for not operating ethically and they have demanded an amount of Rs. 1 Crore.
Now as a young start-up, BZ Tech Ltd. would not be able to pay the compensation amount and now they have to fight the case in court to defend themselves. This ultimately adds on to their burden of costs. If they had they invested in a D&O policy in advance, the insurance company would have protected the personal assets of Directors and Officers and provided financial stability at such a time of contingency.
The policy 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.