What is D&O Insurance
Directors and officers insurance (D&O insurance) can be an extremely valuable type of policy for businesses. As we’ve discussed on our blog, in some cases, directors and officers (and also corporate agents) may be entitled to indemnification when they pursue certain actions in the interests of their company. D&O insurance can potentially offset the costs associated with the indemnification of directors and officers. One common misconception regarding this type of insurance, however, is that these policies are designed specifically for large public companies, or that these policies can only benefit large public companies. In this post, we will discuss the basics of D&O policies, and then discuss why start-up companies may want to obtain one of these policies.
Importance of D&O Insurance
As mentioned, companies may be required to indemnify their directors and officers for costs that follow when a director or officer acts in the interests of the company. Suppose a director or officer brings about a lawsuit against the company because of actions that were made in the course of business. The actions could be so many different things, such as breach of fiduciary duty, violating a business statute, breach of contract, etc. D&O insurance protects companies in these situations because it financially supports the company with this obligation to directors and officers.
Because legal fees can be very expensive, having D&O insurance in these instances can be extremely valuable. In fact, depending on the situation, having this type of insurance may actually save your company. This is particularly true for start-ups, which typically have smaller pockets when compared with larger, more established companies.
Start-Ups and SMBs Face Many of the Same Risks as Larger Companies
Another common misbelief is that start-up companies have lower risk levels than larger companies. Many people assume that this is the case because start-up companies are smaller in size and seemingly have fewer possible legal troubles. The truth, however, is that start-up companies face many of the same risks and same potential challenges as larger companies. The reason for this is because start-up companies engage in many of the same behaviors as larger companies. Like the officers of larger companies, the officers of start-up companies often execute contracts with vendors, suppliers, and manufactures; they make hiring decisions and other human resources decisions; they make certain representations and promises to investors; they make complex decisions that are part of their overall fiduciary responsibilities.
In fact, start-up companies may benefit more from D&O insurance policies because smaller companies are generally less able to absorb the legal fees of litigation. In some cases, start-up investors may actually require start-up companies to obtain and hold D&O insurance. The bottom line is that this type of insurance is far from something that only larger companies benefit from. Like most insurance policies, D&O insurance provides a much needed peace of mind, even if there may be a relatively small chance that it will be used.
Contact Weavil Law for More Information
In our next post, we will discuss D&O insurance in a bit more detail as we discuss the retroactive nature of these policies, as well as other details. For now, hopefully this piece answered some introductory questions about this type of insurance. For more information, get in touch with Weavil Law by calling 650-308-8187 or by email at contact@weavillaw.com.
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