Only publicly traded companies need directors and officers insurance, right?
If you can afford hundreds of thousands, if not millions, of dollars in settlements or judgments, then, sure, go without D&O.
But if you’re a startup – or any company, really, that’s in growth mode and attracting investors, adding board members or operating in a highly regulated field – then you’ll want D&O. In fact, most investors will require you buy D&O before they write you a check.
The rationale is simple: smaller companies tend to be far more vulnerable than a larger company with deeper pockets.
Also, a startup is inherently a riskier proposition, in part because less-experienced executives are more prone to make mistakes, so it just makes good sense for investors to want to protect themselves.
Thanks to its educated workers, access to capital and an international airport, Colorado has the seventh highest concentration of new businesses. One in every three businesses here is no more than five years old, according to the CU Leeds School of Business.
That’s the good news. The bad news is that most venture-backed companies fail, sometimes for lack of focus, lack of good mentorship or after they take advice from the wrong people.
And sometimes, naturally, lawsuits arise.
In some of these cases, say a claim of deceptive advertising or misrepresentation, a company’s commercial general liability policy may step in. But often those policies will only cover certain, specific claims. That’s where D&O steps in.
So, what is D&O exactly? Well, you could think of it as venture capital insurance.
For starters, it protects companies and their directors and officers from lawsuits arising from their actions or decisions while acting in their role as a director or officer.
Think of breach-of-contract lawsuits or claims alleging wrongful interference with a contract. D&O also covers suits arising from consumer protection violations, breach of fiduciary duty, securities fraud in connection with private placements and failure to comply with regulations.
D&O policies not only protect employees and volunteers outside the board of directors, they also can cover external advisors and scientific advisory boards.
It’s important to remember that individuals can be held personally liable for their acts on behalf of the corporation. Government regulators tend to personally name the directors and officers of a company in their actions. In other words, if you’re a founder and officer, your personal assets, your spouse’s and your estate’s assets are all at risk. A D&O policy can help protect you in these sorts of cases, too.
Jeff Parent is an Insurance Advisor and Registered Professional Liability Underwriter at CCIG. Reach him at JeffP@thinkccig.com or at 720-330-7918.
Note: D&O policies can vary significantly from carrier to carrier, with differences in wording and coverage levels depending on the allegations raised in a lawsuit. As with any financial service, make sure you’re getting the best advice.