Breaking down the basics of Director & Officers insurance
As a startup founder, there are many things on your plate to focus on as you grow and scale your business. Director & Officers (D&O) insurance is a handy tool to have in your back pocket to protect yourself as a founder. You may have been requested by an investor to take out this policy. Why exactly do they ask for this, and if you haven’t been asked to take it out, why should you consider getting a policy in place?
We break down the key things of a D&O policy for you to consider whether it is the right time to take the policy out.
Here are three scenarios of when a D&O policy will be useful to you
1. When taking on new investors, managers or shareholders
D&O insurance can protect you from lawsuits and derivative demands from employees, board members or minority shareholders. Demanding investors or shareholders may complain and sue you as a founder for not meeting growth expectations. Alternatively employees may sue the company for unfair dismissals or discrimination in hiring practices. These are common scenarios that can be covered under a D&O policy and something to consider if you are rapidly growing your team.
2. When expanding to new countries with uncertain regulations
Navigating a new jurisdiction and its regulations as part of global or regional expansion can be tricky. Having a D&O policy in place gives you the breathing space to know that if you as a director or the company gets investigated for breaches, the insurance will pick up the legal and defence costs. Very useful to have especially when expanding to emerging markets. Most D&O policies are worldwide in nature. The only region they exclude are claims from North America but that can be included for an extra cost.
3. If you are considering an exit
D&O policies have the possibility to cover lawsuits from past unknown wrongful acts even if you have stepped down and exited from the company. This is helpful to have in place so that you don’t have past acts haunt you once you have moved on from the company. Consider getting a D&O policy in place at least two years before planning an exit to ensure you have that continuous coverage in place.
We now break down the exact details of the policy.
Who is covered?
The policy is taken out under the parent company and includes all directors and officers, both active or retired during the coverage period. This includes employees in a management role. These individuals are covered automatically on an unnamed basis. Meaning you do not need to declare all the individuals, nor do you need to update the insurer on any movements of people. The policy also covers all subsidiaries that you control or have more than 50% control over.
What is covered?
D&O insurance is put in place to protect the above-mentioned individuals from errors or wrongful acts in managing the company that results in lawsuits and investigations. This can include cases such as breach of fiduciary duty, employment disputes with staff, breach of regulation and alleged fraud (until the court finds you guilty or you admit guilt).
Here are a couple of recent high profile cases whereby the companies’ D&O insurance policies may have kicked in. The investigation of Zilingo's CEO for accounting practices, the lawsuit against the Rust film producers for failure to perform industry standard safety checks which resulted in the tragedy on set.
Note that D&O insurance does not cover the company for any errors in its professional services. That is covered under a Professional Indemnity policy.
How are you covered?
The policy covers the legal defence costs (including arbitration) associated with the above-mentioned cases. It also pays for the damages owed to third parties and even costs to third parties to avoid a lawsuit or reduce damages. The insurer however needs to approve these charges before they are pursued.
The cost to hire a public relations company to protect your company’s reputation is included. The policy can cover the cost to challenge a court freezing or disqualification order, and also cover for civil fines. It does not however cover for criminal fines.
When are you covered?
All policies have a start date and end date. This is the policy period. There is also a retroactive date on the policy which can be before the policy start date. You are covered under the policy if the wrongful act occurs after the retroactive date and the claim is reported during the policy period.
You will need to report the claim to the insurers before the costs can be covered. The costs will only be covered once they exceed the claims deductible. It will also cover you if you do not admit liability or settle the claim directly.