D&O: What Kind of Coverage Does it Give You?
D&O, is one of many insurance types available to companies and startups, and one that's often overlooked for more obvious and recognized insurance types like general liability. D&O is short for Director’s and Officer’s liability insurance and it covers the board of directors members of organizations, including for-profits, non-profits, privately held firms, publicly traded companies and educational groups.
D&O protects the personal assets of the directors and officers of those companies, and it offers protection from defense costs and damages in case they are sued by employees, competitors, customers, investors, or other parties, over the decisions they make. With D&O, board members have more freedom to make tough or risky decisions about their companies without worrying about the potential financial outcome.
The insurance doesn’t just cover the directors or officers, either—it also covers the corporate entity too. As such, many officers will want to consider D&O insurance, to protect the company from lawsuits related to accusations of fraud, failure to comply with workplace laws, intellectual property theft, misuse of company funds and other assets, poaching of competitor’s customers, and other claims.
D&O has a range of other benefits too. It can safeguard the investments of venture backers and, since it helps protect board members, it can help attract serious-minded and talented directors and officers to a company.
It's also useful for executives who invest their own personal wealth into private companies. With D&O, board members who have a personal financial stake in the company can be shielded from a huge loss that would otherwise affect their business, their own finances, and the finances of their family.
Basically, every company that has raised capital and has investors, whether it’s construction, healthcare, or tech startup, should invest in D&O, even if they’re smaller, early-stage start-ups since many times they're the ones who are more likely to make mistakes, such as overlooking minor rules in a highly regulated industry or overpromising investors.
Private companies and startups are also the ones with more to lose. According to a 2016 private risk management survey from Chubb, 26 percent (more than a quarter of all respondents!) of private companies have reported a D&O loss in the last few years. $387,000 was the average reported loss, and $17 million was the largest reported. Clearly, losses of that size could wipe out a small or private company. D&O will help buffer against lawsuits, and legal fees that can cost six figures or more.
Companies can invest in a few different types of coverage, or layers, or sides of D&O insurance. They include:
Side A – This directly covers officers and directors, and sometimes employees. It provides coverage for defense costs, settlement fee, or judgments for an individual board member if the company cannot indemnify (or compensate) them.
Side B – This indirectly covers directors, officers, and sometimes employees for when the company can cover their legal expenses. Side B coverage will compensate the organization for those costs.
Side C – This protects the organization. That means when the company gets sued along with a board member, then the coverage will pay for the company’s expenses. This is also known as “entity coverage.”
D&O insurance can be complicated, but in essence, it covers claims that result from managerial decisions that cause negative financial consequences. If you have any questions about D&O, or if you want to find out what kind of coverage your company will benefit from, send us a message and we'll help you determine which type of D&O insurance is right for your business or tech startup.