Key Considerations for Selecting a D&O Insurance Policy

Introduction

Navigating the complex world of insurance can be daunting for directors and officers of any company. Understanding the specifics of Directors & Officers (D&O) insurance and other relevant insurance policies is crucial for protecting both personal and organizational assets against potential litigation. Below is a brief overview of what you need to know when reviewing these policies to determine what policy works best for you and your business.

What is D&O Insurance?

D&O insurance protects the personal assets of a company’s directors and officers by providing coverage against lawsuits that allege they managed the business without proper regard for the rights of others. It covers a wide range of potential legal expenses, including defense costs, settlements, and judgments arising from lawsuits and wrongful act allegations. The aim is to shield your company’s leaders from personal financial loss and, by extension, to safeguard the financial health of the company itself.

The Scope of Coverage and Its Limits

The purpose of D&O insurance is to protect directors and officers if they are individually named in a lawsuit for acts taken in their official capacity. It protects those insured against suits by employees, vendors, investors, customers, and other parties. These suits can stem from various sources, including intellectual property disputes, regulatory compliance issues, and conflicts with shareholders, especially in periods of rapid growth or financial distress. Directors and officers can be held personally liable in such instances, which can be a daunting prospect for anyone considering an executive position at your startup. D&O insurance not only mitigates these risks but also plays a critical role in attracting and retaining qualified executives and board members. Many policies will also provide certain coverage for the company, as well as covering legal fees, settlements, and other related costs.

Key Components of D&O Insurance Policies

D&O policies are typically structured in three parts:

• Side A Coverage: Directly protects directors and officers from personal financial loss when indemnification by the company is not possible, such as in the case of bankruptcy.
• Side B Coverage: Reimburses the company when it indemnifies the directors and officers, thus protecting the company’s balance sheet.
• Side C Coverage: Provides coverage to the company itself for certain types of claims, which is particularly useful for publicly traded tech startups facing shareholder actions.

It's important to be aware of the exclusions and limitations in D&O policies, as discussed below, which usually exclude fraudulent, criminal acts, and personal profiting.

Exclusions

Purchasing D&O insurance is a great strategy to protect your directors and officers, however, it is equally important to be cognizant of the common exclusions found in many of these policies. Some common exclusions are claims between insured parties (“Insured vs. Insured”), acts that occurred prior to the policy inception date (“Prior Acts Exclusion”), fraudulent or criminal acts, personal profiting, and claims that are generally covered by other insurance policies, such as property damage or bodily injury. 

Change in Control Provisions

D&O insurance policies, which typically protect against claims of wrongful acts alleged against a company or insured individuals, often include a change in control provision that affects coverage following significant ownership changes, such as a merger or acquisition. These provisions typically activate upon events such as changes in voting control, restricting coverage to wrongful acts committed prior to the change and placing the policy into run-off, thereby excluding acts that occur after the change. A change in control provision will usually also set forth a notice requirement, which requires the insured to notify the insurer within a specified period.

Considerations When Choosing D&O Insurance

Selecting the right D&O insurance requires understanding the specific risks faced by your startup. Consider factors such as the insurer’s financial strength, the comprehensiveness of coverage, and the clarity of policy terms and exclusions. Note that D&O insurance is typically written on a "claims-made" basis, meaning it only covers claims made during the policy period. Therefore, the retroactive date and the extended reporting period options are critical components to consider.

Conclusion

Choosing the right D&O insurance policy involves careful evaluation of your startup’s specific risks and needs. By understanding the key aspects of coverage, exclusions, and policy terms, directors and officers can better protect themselves and their startups against significant legal and financial risks. To ensure your startup is adequately protected, consider speaking with our experienced advisors at @VirtualCounsel today.