Who pays for the liability insurance of directors and officers at a startup? This question came from someone joining a board of directors who was concerned that they were going to have to pay for it out of their own pocket. That should not be the case – if you are going to join a board and be a director, directors and officers (D&O) insurance is absolutely the startup’s obligation and not something you should pay for out of your own pocket.
What is D&O insurance?
Directors and officers insurance protects both the company’s assets and the personal assets of the directors and officers in the event of a lawsuit. It’s becoming more common to name directors and officers as part of any litigation, and without D&O insurance they could be personally liable for any lawsuits. D&O policies usually include three types of coverage:
- Side A coverage is also known as the “individual’s personal liability coverage, and protects directors, officers, and sometimes employees from legal defense costs, settlement fees, and judgments.
- Side B coverage is also called “company reimbursement coverage” and reimburses the company for any payments it makes to defend or settle claims against directors, officers, or employees.
- Side C coverage is also known as “entity coverage” and protects the company itself for any loss attributed to wrongful acts.
The startup should pay for insurance
Primarily, this is because the startup should want to make director and officer roles appealing and secure. If you’re going to ask someone to be on your board of directions, there’s a lot of liability that comes with that. So the company should be shielding the officers and directors the best they can, which means buying insurance to cover them. And this insurance really isn’t that expensive. According to Forbes, the median cost is $1,240 per year. That price depends on several things, including:
- The startup’s debt
- Any claims history
- Any revenues
- The policy’s limits
- The startup’s industry
Make sure insurance is in place when you join
Anyone invited to join a board of directors should make sure D&O insurance is in place before accepting. You don’t want to do is join a board and have the founder tell you they are working on getting the insurance and that it will be put in place. Without a policy in place, you have no protection, and it’s possible the founder won’t actually get round to buying it anyway. That is something you really want to avoid, since you could be personally liable for any poor decisions the startup makes. .
Startup insurance is crucial
Startups need a lot of different types of insurance as they grow, and D&O insurance is just one part of the overall coverage a startup may need. If you’re asked to join a board or serve as a company officer, it’s perfectly reasonable for you to ask someone within the company, like the CFO, for confirmation that D&O insurance has been paid. Otherwise you’re taking on liability you really don’t want.
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