Mike McLean August 3, 2023 6 min read

Does Your Startup Need D&O Insurance?

Man beside legal balance scale with feather weighing the scale down to symbolize startup needing directors and officers insurance

Directors and Officers insurance isn’t just for huge, high-profile public companies. Your startup or privately-held company can and should get the same protection if it has leaders and stakeholders who interact with customers, employees, investors, competitors, and government agencies.

In fact, a smaller operation is far more vulnerable to financial devastation from litigation fees than a larger company with more money and resources.

Below are some reasons why you might small business directors and officers insurance coverage as part of your startup or private company’s insurance-buying decision process.

Why Your Startup Might Need D&O

You’ve got a brand new startup with a low profile — don’t think it’s exempt from legal troubles. Inexperienced executives are more likely to make novice mistakes such as:

  • Making unrealistic promises to investors, breach of fiduciary duty, etc.
  • Overlooking minor statutes in a highly regulated field
  • Making uneducated HR mistakes

If your startup is venture-backed, investors may require D&O insurance as a means of protecting their investment. D&O protection also helps incentivize potential new hires, especially candidates mindful enough to expect it. This could mean the difference between hiring an average executive and hiring an experienced, top-rated leader.

D&O insurance could protect you and your colleagues from personal losses as you get your bearings. Unsavory lawsuits and legal costs can run in the six or seven digits, potentially crushing your business (and your dreams). Are you equipped to withstand that burden?

The Cost of D&O Premiums for Startups

New companies usually start at $1 million of liability coverage per year, which will run you between $5k to $10k annually.

Keep in mind that the actual price of coverage is virtually impossible to estimate without knowing some key details about your business, such as anticipated revenue, number of employees and officers, the risk level of your industry, among others.

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When Should Your Startup Buy D&O Insurance?

There are many misconceptions about the purpose of D&O insurance and the right time to buy this policy, especially when talking about growing startups. One of the most common misconceptions is that startups that do not have a board of directors do not need directors & officers insurance.

Small business D&O insurance policies exist and can be created to fit the exact needs of your startup, regardless of whether you have put together a board of directors or not. The fact is that startups come in all forms and not every startup organizes its leadership and its company structure in the same exact way.

For example, some startups could raise money through friends and family without having to put together a board of directors and raise money in a more traditional way via venture capital firms. Despite the fact that these types of startups are financing themselves in a different way and are organizing themselves less traditionally, that doesn’t mean that they are safe from the many risks that VC-funded startups face.

Even if you don’t have a board of directors in place, your company and its leadership can still be sure for breach of contract, breach of fiduciary duties, failure to comply with regulations and laws, security fraud, and numerous other types of business claims.

Whether considering startup D&O or private company D&O insurance, younger and smaller companies often envision lawsuits filed against directors and officers as some type of huge media events in which large corporations are being sued for millions of dollars because of corporate espionage or some other type of complicated and spectacular crime.

In reality, an incredible number of things that you and your leadership do in your day-to-day business dealings could potentially trigger a lawsuit against your directors and officers. Entering into contracts with partners such as vendors, suppliers, and manufacturers, for example, can lead to such lawsuits.

Even the processes of hiring new employees and pitching your startup’s business plan in an effort to raise funds can lead to a variety of lawsuits that can prove to be both arduous and expensive.

This is why it really is never too early to purchase a D&O policy, simply because you and your directors and officers are exposed to a large variety of potentially expensive risks even in the earliest life cycles of your organization.

D&O insurance is especially important for smaller startups that have yet to become profitable because it enables these types of companies to cover the costs of litigation without having to divert any of their own funds. If you have a good D&O policy in place, the insurer will be able to cover almost all costs related to lawsuits filed against your leadership.

Here’s another reason why purchasing D&O insurance earlier is a great idea: retroactivity.

Imagine your company is going public, which opens it up to a whole new world of risk. If you purchase your D&O coverage early, the retroactivity of the insurance covers all of the activities that led up to the company’s IPO, which could be incredibly important.

Why Your Private Company Might Need D&O

Reasons for D&O coverage for private companies overlap with those for startups; it helps protect you from a wide variety of litigation, it attracts talent, and it provides a buffer from potentially devastating legal fees.

Surprisingly, private companies are almost as likely to face litigation losses as public ones.

Directors and officers of private companies are also liable in unique ways. Private companies tend to have executives who are involved with business activity on many levels, which puts them in a wider variety of situations where they’re accountable.

Also, private business execs often have a large amount of their personal wealth invested in the company. A huge loss for an executive could be a huge loss for the company and vice versa.

Board members without liability coverage could suffer major losses for themselves, their businesses, and their families.

The Cost of D&O for Established Private Companies

Because they vary in size, the potential range of premiums cost is larger for established private companies than it is for startups.

A mid-sized company may expect to pay roughly $14,000 to $20,000 per year for $3 million in coverage. Talk to your broker for the effect of specific risks on pricing.

When Should Established Private Companies Buy D&O insurance?

Like a startup, an established private company might use certain benchmarks to determine the timing for buying coverage (i.e. hiring talent, growth, changing locations, etc.).

Just keep in mind the bottom line: the larger your network, the more vulnerable your board members are to plaintiffs.

Gone are the days when D&O was restricted to large, public companies. With the cost of premiums down, it’s pretty rare to see established private companies without D&O insurance. Nowadays, no business is immune from executive liability.

Now that you have a better understanding of D&O insurance, you may be wondering how all of this affects your business and where to go from here. If you need more help or information, you can reach out to our team of expert brokers.
Or, if you prefer to get started on intelligent quotes, 
create your Embroker account today.

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