Do members of a board of directors need insurance? Why?
Members of a board of directors will be making a flurry of decisions that will have a profound impact on a company. Some of these decisions will be difficult and will have an impact on many interested parties. Put simply, not every decision a board makes is going to sit well with everyone.
If a board of directors makes a decision that could potentially harm another party, that party can turn around and sue not only the company but the directors and officers themselves. Because directors and officers can be sued personally, this can result in the personal assets of such directors and officers being at risk. This is where the D&O insurance comes into play. It insures directors and officers against such risks.
What if a company makes it a point to protect their Directors and Officers by indemnifying them in the event of such a lawsuit? D&O coverage also insures companies from going out of pocket to reimburse directors and officers by indemnifying the company in that case. Either way, the insurance sees to it that neither a director, officer or the company itself is left holding the bag.
D&O Claims Cost
D&O actions can stem from many different parties, company stakeholders, customers, competitors, even a company’s own employees. It can come from a lot of places. The stakes are high, according the Chubb 2013 Private Company Risk Survey, the average total cost of a D&O claim was $697,902 including judgments, settlements, fines and legal fees.
Needless to say, we’re talking about big money. Companies need to take steps given the rise in D&O claims and the exposure that they encompass.
Pre-requisite to Funding
Another potential key reason to this doesn’t directly speak to risks a board runs, but more to a requirement by a third party. Funding mechanisms such as venture capital and seed funding will typically require Directors and Officers insurance as a pre-requisite to closing out a funding deal. These outside parties want to see that their interests are protected and as such will make it a contractual obligation that a company get this in place before signing off.