No matter which industry you belong to, it’s a fact that all businesses including startups need to have insurance; it comes down to protecting your business, services & products, founders & executives, employees, and even growth. However, from so many different policies available in the market, it can be daunting to decide which is right for your startup business.
Insurance for startup founders should include one essential policy, Directors & Officers (D&O) Insurance. In this post you’ll find a detailed guide on D&O insurance, its benefits, and why startups need to invest in it. This information will help you get through the first few financial milestones of your startup. So without wasting any time, let’s dive into it.
What is D&O Insurance?
D&O is the type of liability insurance that many companies carry. You’d be hard pressed to find a large corporation or enterprise without D&O coverage in place, but it’s essential for scaling startups as well.
To understand why startups need D&O coverage, you first need to know what exactly D&O insurance means. D&O is a policy that protects the directors and officers of a company from claims based on the decisions they make while working for the company.
Directors and board members have a lot of power within an organization, but they also deal with scrutiny for decisions they make every day. If an officer or director takes an action that leads to claims of mismanagement, breach of fiduciary duty, breach of contract, and other related accusations, that individual could be held responsible for all wrongful acts, not the organization. And this is where D&O insurance comes into play; this policy protects senior management from such claims.
This policy shields D&O from these financial and legal liabilities. It builds an atmosphere where management can lead a business and make decisions without worrying about gambling their assets and finances.
Why Does Your Startup Need D&O Coverage?
Being a startup owner, if you are wondering whether or not you should purchase a D&O policy, the answer is – yes. One of the biggest myths about D&O insurance is that only big businesses need it. But the truth is that startups also need it to ensure future growth. A startup can get D&O coverage as long it has stakeholders and leaders who communicate with investors, competitors, government agencies, employees, and customers.
D&O for a Startup
Recently launched startups can be more vulnerable to claims as inexperienced officers may be more prone to making mistakes. Here are some scenarios that may result in the filing of D&O related lawsuits.
- Making an impractical promise to investors
- Breach of fiduciary duty
- Theft of intellectual property
- Failure to follow workplace laws
Keep in mind, if you have a venture-backed startup there are specific mangement liability packages that can help you meet your coverage needs.
How Does D&O Coverage Work?
D&O insurance comes with 3 parts when you purchase a policy. These three parts are known as Sides, which vary depending on the situation. The three D&O insurance Sides are:
Side A: Protects the assets of business leaders for claims where the organization is not financially or legally able to fund indemnification (for directors and officers only)
Side B: Reimburses the private or public organization for payments used to indemnify board members for judgments, settlements, and defense costs. (for the company).
Side C: Extends coverage for the company for security claims only. (for the company)
It is no surprise that investing in D&O coverage has become a crucial part for all businesses – private, public, and nonprofits. Many people think D&O is an expensive policy, but actually, it is quite reasonable. For instance, a small company with a turnover of around $100m can get a no-frills D&O policy with low limits for less than $1,000 annually.
When you purchase D&O insurance, you are liable to pay a premium amount to the carrier. The premium you pay depends on your business type and the coverage plan that the insurer is providing you.
How Much Does D&O Cost?
The premium amount of D&O policy is estimated on the basis of the severity and frequency of claims. Several risk factors can affect the cost of D&O policies. Some of these include:
- Company size
- Past claims record
- Industry sector
- Domestic & international activity
- Professional backgrounds
- Mergers & acquisitions activity
Today, several insurance firms provide coverage to startups starting from $400 annually for nonprofit corporations and $3,000 annually for profit-seeking businesses. This value is a premium amount that startups have to pay for protection against costly settlements. Policy underwriters typically view startups as a lower risk for D&O related claims as compared to publicly listed companies. That’s why public companies could pay between $10,000 to $30,000 per year for $1 million in coverage.
The Key Takeaway
Running a startup means making tough decisions one after another. Being in that position comes with a lot of stress and liability. Even a small mistake could lead to significant legal issues.
So no matter which industry you belong to, being a leader of a startup, you need to be protected. When it comes to protection, D&O insurance is the only thing that can offer the type of coverage you require.
Disclaimer: The materials presented herein are for general reference only. These materials are intended to be used only as guides and should not be used, adopted, or modified without the advice of legal counsel.