Embroker Team September 17, 2021 6 min read

6 Critical Reasons Your Company Needs D&O Insurance

Directors and officers insurance protects your company’s management should they be personally exposed to liability claims for the business decisions and actions they made while running the business. The directors and officers policy, which usually protects the company as well, will cover the legal fees, settlements, and all other related costs that stem from allegations of breach of fiduciary duty, misrepresentation, or errors & omissions brought against your company’s board of directors or officers.

The main function of the coverage is to allow your leadership to make decisions confidently and without fear of personal financial loss.

Who Needs Directors And Officers Insurance?

Small businesses are often under the impression that they don’t need directors and officers insurance and that they won’t experience these types of claims. However, that simply isn’t the case. All organizations, including public, private, and nonprofit companies can be vulnerable to D&O claims. In fact, a 2016 survey performed by Chubb shows that more than one in four private companies experienced a D&O claim over the course of a three-year period. 

Such situations can quickly get overwhelmingly stressful and expensive. The average reported loss from these claims is nearly $400,000 per claim for those without a D&O policy.

D&O claims are not just costly, they can be complicated, stressful, and drag on for years. This may distract the leadership of your company from running the business effectively if they aren’t covered properly. Given the complexity and costs associated with these claims, any company or organization that has a board of directors, has secured investments, or could be accused of financial mismanagement should strongly consider D&O insurance.

The right policy will serve to mitigate a wide variety of risks and allow companies to protect themselves and their directors and officers from lawsuits. 

Why Buy D&O Insurance?

Let’s take a deeper dive into why we suggest most companies should buy D&O insurance and what advantages a good policy can bring to your business:

Provide Legal Cost Coverage

Directors and officers carry a great deal of power and responsibility. They make critical decisions that affect operations, finance, personnel, and more. This exposes them to a diverse set of litigation risks. Lawsuits brought against directors and officers can vary, from smaller claims brought by dissatisfied employees to large securities class action claims by the company’s shareholders.

For example, if third-parties, partners, or investors allege that the company’s execs misused company funds, committed errors and omissions, or misrepresented company assets, they could be held personally accountable, even if they acted on behalf of the company. 

Furthermore, if the organization offers a benefits package to its employees, the leadership has a fiduciary responsibility to manage it to the best of its ability. Should employees or government agencies allege that this is not the case, they will have grounds for a lawsuit. 

Private companies are also subject to government regulation. A government enforcement action brought against your company or management team can be a very costly proposition and trigger formal legal action from government and private entities. If government or independent agencies find that the company failed to comply with workplace laws or determine a lack of corporate governance you could expect to face regulatory actions and fines.

However, with the right D&O coverage in place, these types of issues can be resolved relatively quickly and routinely. The insurance provider will respond and help you deal with the lawsuit, hire the best defense team, and cover the expenses.

Attract Potential Investors

Organizations planning to grow and expand may require external sources of funding. However, investors will want to oversee and protect their investment. This means that they will typically request a seat on the board of directors. To reduce their risk and potential exposure to lawsuits, investors will not only favor companies that have a strong D&O insurance policy but may actually consider it a requirement. 

In fact, most startup funding contracts from institutional investors will typically stipulate that a D&O policy needs to be purchased within 90 days of closing the financing.

Analyzing Insurance Costs for Startups

Embroker Vertical Insurance Index

This report, derived from over 2,000 aggregated and anonymized Embroker transactions, is broken down by different startup funding and revenue stages. All the data represents actual premiums paid and policy options chosen at the time of purchase.

Download the Report

Bankruptcy Protection

If your company files for bankruptcy, having the right D&O policy in place may prove to be crucial.

Even though bankruptcy provides the company with a degree of relief and protection from litigation, its directors and officers may still be at risk. Certain parties may blame the organization’s leadership and their decisions for the bankruptcy and demand that they repay the company’s debts and obligations personally.

If directors and officers of a bankrupt organization are sued, either individually or collectively, they may find themselves in a tough spot, as the company is no longer around to indemnify them and help them defend themselves. A good D&O policy would respond in this situation and provide the executives and directors with protection. 

Cyber Breaches D&O Liability Coverage

Cyber breaches are an ever-growing threat, and their cost to the organization and third-parties can be staggering, with an average of $8.19 million per breach in the US

The question of who is responsible for the breach and its fallout is complex. What is certain, is that customers and investors will typically expect businesses and those who run them to ensure adequate cybersecurity measures are taken.

However, if these affected parties believe that management didn’t do everything in its power to mitigate cyber risks and protect its systems, they may hold directors and officers personally liable for damages incurred.

Attract Better Talent

Organizations are constantly seeking top leadership talent to lead their businesses. However, the market for quality management is highly competitive. Top-tier executives and officers will not even consider joining a company if their personal assets could be put at risk. 

This means that any company looking to attract proven, high-level executives and board members should consider investing in D&O coverage. After all, you can’t insure against worry, but D&O insurance can reduce risk and give your directors and officers the peace of mind needed to go about their work and lead at a high level.

With so much responsibility resting on your management, executives can become overwhelmed with avoiding the adverse consequences of their decisions. D&O insurance allows your management to focus on making the best possible decisions for your company, instead of worrying about the risks associated with their role.

Conclusion

D&O insurance is a great financial tool for reducing risk and giving your directors and officers the peace of mind to confidently make the needed, sometimes difficult decisions neccesary to spark growth. It can also strengthen your financial planning by eliminating the fear that you’ll need a stockpile of funds to combat potential litigation.

For more details on D&O for startups and private companies, see our Ultimate Guide to D&O Insurance.

If you are involved with a venture-backed startup, you can get market-leading D&O insurance in less than 60 seconds through the Embroker Startup Packageclick here to get an instant quote.

With the Embroker Startup Package coverage can be bound in minutes and at stellar prices. It’s not just better than other options in the marketplace, it’s on an entirely different level.

If you need more help or information, you can reach out to our team of expert brokers. 

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