Here are a few trigger points where a company will want to get this directors and officers coverage in place.
A prerequisite to a funding round
One point at which it makes sense to insure your directors is if getting a pile of money depends on it. In many cases, VC or private equity firms will make this a contingency to closing a round of funding for a company. The amount of coverage will be set by the entity but more often than not it is a stock 1mm coverage amount. EPLI may also be a component of this prerequisite and would be a seperate line item in a comprehensive management liability policy, just be aware.
You are trying to land a board member and they require it
I’ve had clients out in Silicon Valley try to bring experienced people in to become part of a board of directors. The people that were targets of these companies were experienced old hands in the tech and startup space, so one of the first requirements these folks had was making sure that D&O was in place. If you are trying to put a board in place made up of experienced industry veterans, be prepared to have Directors and Officers coverage become part of the conversation.
A third time frame is a little more of a judgment call on the timing, but if you yourself are an officer and are asking this question, you will want to consider it when you feel it is time to……
CYA-Cover Your Ass
As soon as there are directors and officers acting in a management capacity, there is a need for this type of coverage. Most bootstrapping startups will put it off until there is a trigger and that’s understandable but if the company has some traction and is moving along well enough where the resources are there, get this in place.
Claims made against the directors and officers of a company can put their personal assets at risk. In the event that a director or officer is named in a lawsuit on a claim that stems from the management of a company, there is a high probability that other insurances such as General or Professional Liability will not cover such claims. Directors and Officers coverage deals with precisely these types of issues. With the broad range of issues facing company management, the scope of potential litigants and the rise in claims made against directors and officers, if you aren’t looking into this type of coverage, you probably should be.
How does Directors and Officers coverage work?