Directors and officers (D&O) insurance coverage is offered to any company manager. It protects against claims that may arise from decisions and actions taken within the scope of their regular responsibilities.
Companies purchase D&O insurance because managers can make mistakes. Managers receive financial protection against the consequences of actual or alleged wrongful acts. Some policies offer company directors liability coverage while also reimbursing the insured company in the event it paid the claim of a third party on behalf of management.
What Type of Business Needs D&O Insurance?
For any startup business to attract top talent, secure funding and go public, it is wise to invest in D&O insurance.
Directors and officers insurance is a liability policy that protects against lawsuits over decisions of directors and officers may make while running a business. Many people refuse to consider a leadership or board position without this type of protection.
D&O insurance covers legal and settlement costs if a former employee or vendor sues them over a business decision. Without D&O insurance, a director or officer would have to pay these legal costs out of pocket. Another attractive quality of D&O insurance is it also protects the personal assets of both active employees of the company and those who leaven — as long as the policy is still in effect.
Private equity firms require D&O insurance before making investing in a company. Startup businesses solid balance sheets also are included.
Below are examples of the types of businesses that need D&O insurance.
Startups: While many businesses completely disregard D&O insurance because they assume it is only for large and publicly traded organizations, this couldn't be further from the truth. In reality, startups and other small businesses need D&O insurance. When executives and stakeholders contact other employees and investors, there is always a risk for a lawsuit. Don't succumb to the notion that this type of insurance is only for larger companies. It could cost you significantly.
Private equity firms: When the number of shareholders in a private company' increases, there is a higher risk that a disgruntled shareholder will sue the directors and officers. D&O insurance is designed to respond to this risk.
Venture capitalists: D&O insurance is important to venture capitalists. When they consider investing in a developing business, they care about protection, proof of stability and promise of growth. D&O insurance brings peace of mind to venture capital firms.
Who Should be Covered by D&O Insurance?
Organizations with a corporate board or advisory committee should consider investing in D&O insurance. This also includes nonprofit organizations. A company doesn't have to post revenue in millions of dollars for directors and officers to be personally sued over their management style. Smaller companies with few assets could need protection just as much as a large, deep-pocketed business.
Adding a Succession Plan to Your D&O Insurance
Adding a succession plan helps your business transition properly. This is important, especially when you lose people who own the business or a massive stake in it. An effective succession plan is the company's insurance policy for sustainability. This is much more evident when vital positions are open. A well-thought-out succession plan means that there are always talented and properly trained employees who can step in before operations fall into chaos.
More often than not, succession planning is low on the company's priority list. However, crucial roles are difficult to fill. All organizations need to be ready to respond to employee departures, whether planned or unexpected.
Say you are a football coach right before a big game, and one of your most valued players announces he is leaving the team. Do you have players on the bench with the right mix of skills, maturity and motivation to take the departing player's place? You should.
Succession planning is ensures every critical role vacancy is passed along to the appropriate employee.
Key roles in business are in leadership, are highly specialized or essential operations positions. A company is responsible for identifying internal talent and preparing those employees for critical positions if the need to fill them arises. This concept is not to be confused with replacement planning because it doesn't focus solely on temporary solutions. Succession planning is a way to counteract turnover that enables companies to continue operating successfully in the long term.
The ground rules of succession planning can be broken down into these steps:
- Identify current and future needs based on strategic planning and company vision.
- Find crucial roles and identify executive profiles. High-level directors are always vital roles, but it doesn't hurt to look at lower-level roles, too. Gather as much information as you can about when vacancies might happen.
- Assess key talent. This can be done through performance reviews. Conduct surveys if necessary.
- Plan. Determine who can fill which positions and conduct a gap analysis. That way, you can reveal the difference between current skills and those needed for the future.
- Reevaluate. Don't just forget about succession planning — it is an ongoing process that needs to change with the business. Review your succession plan regularly to keep it up to date.
What is a Cross-Purchase Plan?
A cross-purchase plan is a document agreement that allows a company's partners to purchase the interest shares of another partner who dies or retires. The plan tends to rely on a life insurance policy in case of death. It is usually used in a business's continuation planning. Under this method, a document outlines how all the shares can be divided or purchased by any remaining partners.
Compare D&O Insurance
The best D&O insurance companies are listed below with insight on where they rank.
When to Buy D&O Insurance
D&O insurance should be purchased as soon as your company raises capital, is taken on by a venture capital firm or has an established board of directors. This insurance should be purchased at the growth stage.
Protection is crucial when it comes to growing your business. Let Benzinga help you sort out your needs, compare companies and set you up for the most protection.
Frequently Asked Questions
Is D&O insurance necessary?
Yes. D&O insurance is necessary and quite common to cover actions and decisions of board directors and officers. These policies provide enough coverage for defense costs, settlements, judgments that arise from lawsuits and any wrongful allegations that are brought against a company or nonprofit.
Nonprofits need to invest in D&O insurance and develop an effective risk management plan to protect individuals and the overall organization while preventing claims against the D&O insurance policy.
What is E&O insurance?
Errors and omissions (E&O) insurance and is a type of professional liability insurance. E&O insurance protects companies and workers against claims of inadequate work or negligent actions. Anyone who provides a service, whether financial, insurance agents, doctors, lawyers and even wedding planners requires E&O insurance. The average cost of E&O insurance depends on the nature of the business, the size of the company and claims history. It typically costs between $500 and $1,000 per employee each year.
You never want to be in a situation where a client sues you because they incur a loss resulting from an error or omission made during an application process or consultation. E&O insurance covers legal fees and any other damages incurred to the client if they are owed.