D&O insurance protects your company’s management should they be personally exposed to liability claims for the business decisions and actions they made while running the business. D&O coverage allows your leadership to make decisions confidently and without fear of personal financial loss.
The directors and officers policy, which usually protects the company as well, will cover the legal fees, settlements, and all other related costs that stem from allegations of breach of fiduciary duty, misrepresentation, or errors & omissions brought against your company’s board of directors or officers.
The average reported loss from these claims is nearly $400,000 per claim for those without a D&O policy. D&O claims are not just costly, they can be complicated, stressful, and drag on for years. This may distract the leadership of your company from running the business effectively if they aren’t covered properly.
Given the complexity and costs associated with these claims, any company or organization that has a board of directors, has secured investments, or could be accused of financial mismanagement should purchase D&O insurance. Here’s why.
Top 5 Reasons to Purchase D&O Insurance
- Provide Legal Cost Coverage – Directors and officers carry a great deal of power and responsibility. They make critical decisions that affect operations, finance, personnel, and more. This exposes them to a diverse set of litigation risks. Lawsuits brought against directors and officers can vary, from smaller claims brought by dissatisfied employees to large securities class action claims by the company’s shareholders. With the right D&O coverage in place, these types of issues can be resolved relatively quickly and routinely.
- Attract Potential Investors – Startups and organizations planning to grow and expand may require external sources of funding. However, investors will want to oversee and protect their investment. This means that they will typically request a seat on the board of directors. To reduce their risk and potential exposure to lawsuits, investors will not only favor companies that have a strong D&O insurance policy but may actually consider it a requirement.
- Bankruptcy Protection – If your company files for bankruptcy, having the right D&O policy in place may prove to be crucial. Even though bankruptcy provides the company with a degree of relief and protection from litigation, its directors and officers may still be at risk. If directors and officers of a bankrupt organization are sued, either individually or collectively, they may find themselves in a tough spot, as the company is no longer around to indemnify them and help them defend themselves. A good D&O policy would respond in this situation and provide the executives and directors with protection.
- Cyber Breaches – Cyber breaches are an ever-growing threat, and their cost to the organization and third-parties can be staggering, with an average of $8.19 million per breach in the US. The question of who is responsible for the breach and its fallout is complex. What is certain, is that customers and investors will typically expect businesses and those who run them to ensure adequate cybersecurity measures are taken. However, if these affected parties believe that management didn’t do everything in its power to mitigate cyber risks and protect its systems, they may hold directors and officers personally liable for damages incurred.
- Attract Better Talent – Organizations are constantly seeking top leadership talent to lead their businesses. This means that any company looking to attract proven, high-level executives and board members should consider investing in D&O coverage. After all, you can’t insure against worry, but D&O insurance can reduce risk and give your directors and officers the peace of mind needed to go about their work and lead at a high level. D&O insurance allows your management to focus on making the best possible decisions for your company, instead of worrying about the risks associated with their role.
D&O insurance is a great financial tool for reducing risk and giving your directors and officers the peace of mind to confidently make the needed, sometimes difficult decisions necessary to spark growth.
Interested in learning about the Basics of D&O Insurance or When Should You Buy D&O Insurance? Or check out the 5 Common Sources of D&O Liability. There is nothing more important when it comes to protecting your company, especially if you are raising capital. Contact the experts at HRO Resources to get started with a quote today.