Why D&O insurance is crucial for startups

Insureon staff
If your startup wants to attract top talent, secure funding, or eventually go public, it's a good idea to have directors and officers insurance.
Two women examine code together on a computer display.

Directors and officers (D&O) insurance is important for any startup that wants to attract top talent, secure funding, or eventually go public. It’s a type of liability policy that protects against lawsuits over the decisions directors and officers make while running your business.

Many candidates won’t consider a leadership or board position at a private company without this type of coverage, as it covers the legal and settlement costs in the event that a former employee, vendor, or any stakeholders sue them over a business decision or a claim of mismanagement.

Without this indemnification, a director or officer would have to pay these legal defense costs themselves. D&O insurance protects the personal assets of both active members of the company, as well as those who leave the company, so long as the policy is still in place.

Many private equity firms and venture capitalists require D&O insurance before they’ll invest in a company, even startups with a solid balance sheet.

D&O insurance is important for any startup that wants to attract top talent, secure funding, or eventually go public.

John Huddleston, Sales Manager, Digital Agency at Insureon, says a startup should buy D&O insurance as soon as they have investors or an active board of directors.

“D&O protects board members from lawsuits over decisions they make while serving on your board. If they're sued, they could have to pay thousands of dollars in legal costs,” Huddleston says.

Find the right business insurance coverage for your startup

View video transcript.

[video: an illustrated header displays the Insureon logo and the text: "What insurance do I need for my startup business?"]

NARRATOR: Starting a business often comes with the same or even greater risks that bigger, established businesses face. But having the right insurance coverage will protect your business from costly legal fees, repairs, and medical expenses.

There are several insurance policies you can carry that offer valuable peace of mind, and safeguard your new business.

General liability insurance covers third-party accidents, such as customer injuries or property damage.

[video: an illustrated header displays the text: "General liability covers: Slip-and-fall accidents; Client property damage; Product liability lawsuits"]

Commercial property insurance covers costs if your business property is damaged, destroyed, or stolen.

[video: an illustrated header displays the text: "Commercial property covers: Fires; Storm damage; Equipment theft"]

A business owner's policy, or BOP, bundles general liability and commercial property coverage together. It typically costs less than buying both of these policies separately.

[video: an illustrated header displays the text: "A BOP covers: Client accidents; Stolen or damaged property; Business interruptions"]

Errors and omissions insurance will protect your business from lawsuits related to work mistakes and oversights. This policy is also referred to as professional liability insurance.

[video: an illustrated header displays the text: "Errors and omissions (E&O) covers: Accusations of negligence; Missed deadlines; Errors that cost clients money"]

Cyber Insurance can help your business financially recover from data breaches and cyberattacks.

[video: an illustrated header displays the text: "Cyber insurance covers: Data breach notification costs; Data breach investigations; PR costs for reputational harm"]

Workers compensation insurance is required in most states and can shield your startup from work-related medical costs.

[video: an illustrated header displays the text: "Workers' comp covers: Work-related medical expenses; Disability benefits; Lawsuits from employee injuries"]

Commercial auto insurance protects your business from auto accidents involving company-owned vehicles.

[video: an illustrated header displays the text: "Commercial auto covers: Auto accident injuries; Property damage caused by vehicles; Vehicle theft and vandalism"]

Employment practices liability insurance helps pay for legal expenses if an employee sues your startup for discrimination, harassment, or wrongful termination.

[video: an illustrated header displays the text: "Employment practices liability covers: Wrongful termination claims; Discrimination lawsuits; Other violations of employee rights"]

Directors and officers insurance covers lawsuits related to decisions made by officers and board members on behalf of your startup.

[video: an illustrated header displays the text: "Directors and officers insurance covers: Lack of transparency; Mismanaged funds; Failure to comply with regulations"]

So, why is it important for you to have insurance for your startup?

[video: an illustrated header displays the text: "Why is insurance important for a startup?"]

You may need coverage to sign a contract or lease. You also might need insurance to comply with federal, state, and local laws.

[video: an illustrated header displays the text: "Startups may need insurance to: Sign a contract or lease; Apply for a loan; Comply with federal or state laws"]

Additionally, insurance protects your startup from catastrophic losses that could shutter your business. Plus, the right coverage can help you gain client trust, as well as attract top talent to your startup.

[video: an illustrated header displays the text: "Insurance can also help: During business closures; Gain client trust; Attract talent"]

Get the best coverage for your startup with Insureon today. Click the link to get started.

[video: an illustrated header displays the text: "Insureon is your #1 agency for small business insurance"]

[video: an illustrated header displays the Insureon logo]

What does directors and officers insurance cover?

Directors, officers, and investors must make all kinds of decisions for a company, leaving them open to potential lawsuits against your business or its leadership.

A D&O insurance policy can protect against legal claims for:

  • Breach of fiduciary duty
  • Trademark or IP infringement
  • Wrongful termination
  • Cyber liability
  • Misrepresentation of company financials

While timing to buy D&O insurance can vary from business to business, most tech startups will pursue this coverage when they are trying to recruit or retain employees who will have extensive knowledge of the company's intellectual property, or when the private company has plans at any point to go public.

I don’t have a board or investors – do I still need D&O insurance?

Even without directors or investors, the day-to-day business of running a startup could still trigger a lawsuit. Hiring employees, raising venture capital, and contracting with vendors, suppliers, and customers are important for any startup, yet they also leave your business open to a potential claim.

A D&O insurance policy means you won’t have to divert your company’s financial resources to defend against an unexpected lawsuit – and lawsuits can affect both public and private companies.

Any financial decisions you make today could face greater scrutiny if your business eventually pursues an IPO. Having a D&O policy early on could ensure your business is protected from the many financial decisions that were made in the early days of your business, and as you move towards going public.

Get D&O insurance quotes from top carriers

How much D&O insurance do I need?

A 2021 case study from The Hartford [PDF] reviewing 10 different D&O claims showed that the average cost of a D&O claim was $403,800, with the maximum claim approaching $1 million. The survey also showed that 7 of the 10 D&O claims reviewed were filed against companies making $10 million or more in revenue.

The median limit of D&O insurance policies purchased by Insureon customers is $1 million. Higher limits pay out more on a claim but also cost more.

How much does D&O insurance cost?

A small business owner calculating their D&O costs

With Insureon, the median cost of D&O insurance for our customers is $103 per month. Your cost of directors and officers insurance can depend on several factors, including:

  • Number of employees and directors
  • Geographic footprint
  • Company finances
  • Risk profile
  • Deductible amount
  • Past claim history
"The average cost of a D&O claim was $403,800, with the maximum claim approaching $1 million."

What other types of startup insurance do I need?

While D&O insurance is important, it doesn’t cover bodily injuries, property damage, or employee lawsuits, for which you’ll need other types of business insurance coverage.

Commercial general liability insurance is often the first policy that a new business owner purchases from their insurer, as it protects against common business risks such as customer injuries and advertising injuries. It does not protect your directors or investors from the decisions they make.

Huddleston notes that many insurance companies bundle D&O policies with employment practices liability insurance (EPLI), which can protect your small business if you’re sued by employees who claim their civil rights were violated.

“With the current market during the pandemic, most carriers will bundle D&O with EPLI,” Huddleston says. “EPLI is a huge selling point because companies are being sued over vaccine mandates, mask mandates, and wrongful terminations due to mandates.”

Cyber insurance offers protection against the high costs of data breaches and malicious software attacks. Even if your company is not a tech startup, this insurance can cover customer notification, legal fees, and fines from government agencies and regulatory bodies.

Find D&O insurance quotes from trusted carriers with Insureon

You can complete Insureon’s easy online application today insurance and talk to an agent to compare policies on D&O insurance and many other policies from top-rated U.S. companies. Once you find the right policy, you can get coverage from an insurance carrier in less than 24 hours.

Hannah Filmore-Patrick

Hannah is a contributing writer with a diverse writing and content building background. She's worked on topics from technology to insurance. She's competent with both language and SEO, and continues to work with a variety of business verticals to create engaging, optimized content.

Updated by Mike Mosser, Content Specialist

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