Why Startups Need D&O Insurance

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As you begin looking into the different types of insurance your startup will need, you’ll come across a type of insurance known as D&O or directors and officers insurance. Many business owners disregard D&O insurance, assuming it’s only for large, publicly traded companies. The assumption is often that startups are simply too small to need D&O insurance.

The truth is, startups and small businesses do need D&O insurance. If you have executives and stakeholders who come into contact with employees and investors, then you are a risk for a lawsuit.

Lawsuits Happen

Imagine that you laid off an employee and that person felt personally targeted by one of the executives in your company and decided to sue. This is a scenario that happens to companies of all sizes.

D&O insurance protects the personal assets of company executives should a claim be filed against them by employees, investors, or other parties. D&O insurance is a very specific type of coverage that will protect you from management liability lawsuits.

This survey looked at 451 companies and found that 12 percent had experienced a D&O lawsuit in the previous five years. The average cost to settle these lawsuits was $225,682 with some losses as high as up to $5 million. And one in six company executives believes that their company could be hit with a D&O lawsuit in the coming years.

If you are a startup or company that is going through a period of growth and attracting investors, you will want D&O insurance. As a startup, you are more vulnerable than larger companies and have a lot more at stake.

Your risk of being sued may not be as high as larger companies, but you also have fewer resources to deal with it in the event that it does happen. And as a startup, a large D&O lawsuit could be financially devastating to your company.

Types of Coverage and Costs of D&O Insurance

D&O insurance protects your company, executives, employees, and members of your board from lawsuits resulting from mismanagement of the company. It covers things that general liability insurance will not cover including misrepresentation of company assets, misuse of company funds, breach of fiduciary duty, and more.

There are three “sides” to D&O insurance and each offers different facets of coverage:

  • Side A: Side A provides coverage when a company cannot indemnify its directors and officers.
  • Side B: Side B will reimburse the company for its duty to indemnify its directors and officers. Side B will deal with most D&O claims.
  • Side C: Side C is called entity coverage and ensures that there is corporate coverage when the company is sued as well.

D&O insurance can be purchased by itself or with a combination of other types of coverage. Although for startups it is usually more cost-effective to purchase a combination policy.

The costs will be based on a variety of factors such as the type of business you own, company revenue, and any previous legal actions taken against your company. In general, D&O premiums can range anywhere from $3,000 to $7,000 for every $1 million in coverage.

It is important to note that D&O insurance does not cover lawsuits between the directors and officers of the company. This prevents the officers within the company from colluding against the insurance company. And acts of fraud will not be covered by D&O insurance.

Getting Started with D&O Insurance

So as a startup, how do you know when you even have the revenue to justify purchasing D&O insurance? Obviously, the answer will be different for each company but there are several indicators that it is time to consider purchasing D&O insurance.

For instance, you may find yourself in the position where it is a requirement to either bring on a new board member or acquire more funding. And as soon as your startup has directors or executives acting in a management capacity you have a need for D&O insurance. Ultimately, the best place to start is by speaking with a broker to discuss the needs of your company.

It’s no secret that purchasing business insurance can be a hassle. And when you are in the early stages of launching your startup, time and money are often in short supply.

This is why we recommend using online platforms like Embroker. Embroker partners with the leading insurance carriers in the industry and provides policies that are tailored to meet the specific needs of your startup. With their guidance, you can quickly eliminate any gaps in coverage and actually pay less for your business insurance.

About the Author

Charong Chow is Head of Content at Embroker, which empowers businesses to take the risks that will help them grow. Based in San Francisco, she’s been published in both online and print media and makes a point to takes risks every day.

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