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Do start-ups need directors’ and officers’ insurance?

04-08-2019

Do start-ups need directors' and officers' insurance?

In a word, yes.

Every business owner needs a D&O policy. It should be top of your insurance-to-get list.  

Directors’ and officers’ liability insurance might seem unnecessary right now. I mean, you probably don’t even have a boardroom table, let alone a bunch of directors sitting round it.

But the thing is, the risks of running a business start from day one.

And while there are other insurance policies you’ll want to get, like general liability, or errors and omissions, they only protect the corporate organization. Not the individuals running it.

Ok, so maybe right now that’s just you. And your business partner, if you have one.

But you still need the kind of protection you’ll get from D&O insurance.

What is directors’ and officers’ insurance?

It’s on-the-job coverage for company bosses. It protects their personal assets if they’re sued.

Because in the eyes of the law, company leaders are personally liable for decisions they make on the firm’s behalf.

So, if someone thinks you, or one of your directors, has done something wrong, they can sue the individual concerned.

And that someone can be anyone. It could be an angry investor, claiming their money’s been mismanaged. An ex-employee claiming unfair dismissal. It could even be a competitor.

To make things worse, ignorance is no excuse. You can be slapped with a suit even if you unknowingly did something wrong.

Lawsuits don’t come cheap. Nowadays they can run to six, sometimes seven figures. However deep your pockets are, that’s a lot of dollar to find yourself.  

If you’ve got directors’ and officers’ insurance you won’t have to. A D&O policy can pick up the tab.

Even if the claim’s groundless. It’ll get you an attorney in court and pay for your defense. Then, if you’re found liable, it’ll pay your fine and take care of the damages.

What does D&O cover?

It varies from policy to policy. But as a general rule, D&O protects you, your business, and your personal assets from claims of wrongdoing.

‘Wrongdoing’ includes:

  • Lack of, or poor, governance
  • Mismanagement of company funds
  • Underperformance (of stock, or the company)
  • Breach of duty, care, or company law
  • Failing to comply with rules and regulations
  • Making decisions without the right authority
  • Poor employment practices

D&O doesn’t cover instances when a company leader’s deliberately broken the law. Like committing fraud.

Or, wrongdoing claims made against the company as a whole.

Why’s D&O important for start-ups?

Cool under pressure

Start-up’s a time when rapid decision-making is called for. You’re trying to make the most of opportunities as they present themselves. Stay ahead of competitors. And adapt to unexpected challenges.

In such a high-pressure situation, mistakes are likely.  Especially if your execs are inexperienced.

Promising something you can’t deliver to investors, overlooking regulations, or making an unwise HR choice. These are all decisions which risk a wrongdoing claim.

Back-up plan

Borrowed to set up your business? Or maybe you’re going through a growth spurt and looking for funding? Before they sign, or hand over a dime, investors may insist you have D&O insurance.

It’s not unreasonable. If they’re buying into your business they may expect a stake, and a seat on your board. And since, statistically, most venture-backed companies fail, it’s simply to protect themselves and their investment.

On-board cover

Being on the board shouldn’t mean your personal assets are at risk. As any CEO or director worth their salt knows.

So when you’re hunting for new hires, a D&O policy makes your firm much more attractive. And to the right caliber candidate, too.

How much does D&O insurance cost?

Without knowing some key details about your business, it’s impossible to give you an exact price. But policies start around the $1,500 mark.

Which is not a lot really, when you consider what a lawsuit could cost you. However, it’s quite a figure to factor into your start-up budget. And right now, depending on your revenue, it might be a cost you can’t justify.

But it’s definitely something to think about when you’re:

  • Looking for investment or closing a deal
  • Changing your firm’s location
  • Hiring and want to attract the right caliber
  • Growing the business through merger/acquisition

Pocket protection

Being your own boss is one of the main reasons to start your own business. But while it’s tempting to think you don’t answer to anyone anymore, the fact is, you do. To shareholders, investors, employees, ex-employees, customers, clients and competitors, too.

And it’s tough at the top. Decisions – sometimes difficult ones – have to be made daily. One duff one, resulting in a lawsuit, could leave your start-up stationary. And you, out of pocket.

A D&O policy’s peace of mind. It’s pocket protection while you’re learning the ropes.  

If you’d like to know more, check out InsuranceBee’s D&O packages. Or give us a call at: 978.344.4215. Small business insurance is our business. We can help you get a product that’s right for you. And it’ll only take a minute or two.

Image: Creative Commons ‘two persons standing under bullet CCTV cameras’ by Burst, Pexels.

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