We write about Directors and Officers insurance here a lot and for good reason:
The risks that D&O policies are designed to address are part and parcel of corporate life, and even the most ethical, by-the-book executive or board member can find themselves personally named in lawsuits over actions taken during their watch.
My thoughts went to D&O coverage recently after Colorado Securities Commissioner Gerald Rome announced that, since last summer, he had ordered 18 companies running initial coin offerings, or ICOs, to cease their offerings in the state of Colorado.
ICOs are used to help cryptocurrency operations raise money. If 18 sounds like a big number, it’s because it is.
“The sheer number of orders entered against ICOs should be a red flag to all investors that there is a real risk that the ICO you are considering is a fraud,” Rome said in a statement. “Our investigations show that there are fraudsters who will simply create a fake ICO to steal investors’ money, or spoof a legitimate ICO to trick investors into wrongfully paying them.”
Providing false information in that way, of course, can quickly lead to court action against an executive or board member, even one who might have been unaware of the provision of said information.
I think it’s important to stop for a moment here to say that there are plenty of good guys in the cryptocurrency space, honest entrepreneurs revolutionizing their corner of the digital world. Regardless, crypto investors have been rushing to the exits lately as state and federal regulators have cracked down on bad apples for selling unlicensed securities. It should surprise no one that some of those investors will sue.
So, how does a D&O policy help?
Illegal acts or illegal profits are generally not covered under D&O insurance. But these policies, which usually protect the company as well, cover legal fees, settlements and other costs.
If you are looking to secure venture capital or funding from investors, you will most likely need to have D&O coverage in place.
Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses and non-profits with fewer assets may need the protection of a D&O policy just as much as large, deep-pocketed corporations.
Similarly, if you want to attract and retain qualified directors, D&O coverage will protect those who might otherwise be reluctant to put their personal assets at risk.
As with all insurance products, read your policy carefully to make sure you’ve got coverage for a wide range of claims, from regulatory actions to criminal investigations and employee lawsuits. Here are a few other things to consider when discussing D&O insurance with an insurance professional:
- Should the policy just cover directors and officers or also the company as a whole?
- Does the policy cover innocent directors if one director or officer is found guilty of wrongdoing?
- Will the policy cover allegations of criminal misconduct up to the point of adjudication?
- What policy limits (generally provided in $1 million increments) do you need?
Finally, securing D&O coverage for a cryptocurrency operation won’t be as easy as calling Flo to insure the old Honda. Many insurers are just as skittish as investors at the moment, so if you’re in the market, you’ll want to consider using an insurance professional with a deep bench of experience, expertise and focus.
Jeff Parent is an Insurance Advisor and Registered Professional Liability Underwriter at CCIG. Reach him at JeffP@thinkccig.com or at 720-330-7918.