Any Tech startups will be involved in many important tasks, whether it is development of new technology, filing patent, recruiting staff or raising funds. And insurances is also on the list of things to do. Apart usual standard insurances (see our article 10 types of small business insurances you shoud have ), you must also have heard how Directors & Officers liability insurance (D&O) can help your tech startups or have been required to purchase one. If you are wondering whether D&O is really needed for your business, this article is for you.
Every day, company directors and officials must make difficult choices. Because of this, directors & officers insurance (D&O) safeguards them as they carry out their duties. D&O insurance coverage shield a company’s directors and officers from lawsuits stemming from choices they made while serving in a corporate role.
A D&O program’s coverage can vary from policy to policy. However, they all typically give security for their own assets as well as covering for board members and executives. D&O can also protect the business by paying the corporation back after an officer or director has been indemnified. In some circumstances, it may even defend the business against itself!
The D&O Insurance coverage
D&O insurance is distinctive since it has three “sides.” Sides A, B, and C of the major clauses each provide a variety of coverage:
Side A: This offers protection for damages incurred by an insured individual (director or officer) for which the company is unable to provide indemnification. According to the firm’s bylaws, the company may have decided not to indemnify this person, or more frequently, its insolvency prevents it from doing so.
Side B: While Side A protects the individual, Side B offers protection for the business’s duty to hold directors and officers harmless through indemnification.
Side C: This ensures that the business itself is covered in specific circumstances and is referred to as entity coverage.
Is D&O only for large listed company?
A common misconception of D&O is that it is only needed to protect the board of directors of large listed companies. Although it was the primary reason for developing such coverage, D&O coverage is relevant for most companies and particularly for tech startups even without board members. Indeed, D&O will provide liability coverage for all directors and officers of the company that are involved in the management. So any founders and managers are also exposed, especially if the company have raised a lot of money. You could be sued for many different reasons like:
- Failure to deliver service
- Wrongful employment termination
- Security fraud
- Failure to comply with laws or regulations
- Cyber liability
- Consumer protection violation
Why investors will require you to buy D&O?
As a tech startups, you will most likely raise money and you will be asked to buy D&O Insurance. Why? Because investors knows the risks faced by tech startups and understand that D&O claim can jeopardize any small business by wiping out the company cash flow. In the event of merger or acquisition, the risk will increase significantly if the company is not performing well: investors of the newly acquired company may sue if they consider they have overpaid for the deal.
Balance sheet protection
In case of litigation, the insurance company will manage any litigation raised against the management allowing the company to secure its financial resources. It is therefore an important way to secure the company balance sheet. D&O covers many aspects that commercial general liability insurance does not cover, like breach of contract, unfair trade practices or regulatory actions.
When is a good timing to buy D&O?
The timing may differ for each company but usually, it is important to consider D&O policy when:
- You are recruiting or retaining staff that have a good knowledge of your intellectual property.
- You are looking for investors or considering to go public.
If you are recruiting a candidate from a competitor, you may be dragged into a dispute. But if you are losing a key employees that have a particular knowledge of your company’s intellectual property, it can have a significant impact for the company or its investors.
And if you are looking for being public, the fact that the D&O was set up early enough is an important assets as it will cover retroactively all operations leading to the company going public.
We are often approached when tech startups start realizing that they may face Directors and Officers’ risks, but it is often too late to activate such policy. If you need more information regarding Directors and Officers liability insurance, please visit our website or contact us at firstname.lastname@example.org