Entrepreneurs: What is Directors and Officers Insurance, and Could it Cost You Millions if You Don’t Have it?

If you’re an entrepreneur, insurance may not be the most exciting topic for you to read about. But it’s actually one of the most important. 

Whether you like talking about it or not, insurance can be vital for any size of business. Business insurance can help provide you with a crucial safety net should things turn for the worse. For example, if someone is injured in your offices, or if you become a victim of a cyberattack, or if you’re suddenly required to invest in public relations crisis management, business insurance can help provide you with the necessary legal and financial costs to continue running your business. We have some entrepreneurs: what is directors’ and officers’ insurance, and could it cost you millions if you don’t have it.

As a business owner, you may already be familiar with Professional Indemnity Insurance and Public Liability Insurance. What many business owners and managers don’t recognise, however, is the importance of Directors and Officers Insurance (or D&O Insurance).

One of the most strategic ways to safeguard your financial future is through D&O Insurance. But before we tell you why, it’s important to gain a stronger understanding of the nature of business insurance.

Is it legally required for your business to have insurance?

For particular businesses in industries such as mining, consulting, construction and health, having particular types of insurance, such as professional indemnity insurance, is actually required in order to legally operate (please contact a qualified Business Insurance Broker to see what types of insurance are necessary for your business in your country). Further, not renewing your insurance in time could result in your business being required to cease operation completely, resulting in catastrophic losses.

Insurance when looking for investors

Insurance is also important to have if you’re looking for funding or external investment in your business. Large investors, institutions and banks will only consider businesses that have the right insurances in place. If you think you’re at the stage where you can finally take your company public, insurance is a must.

The most common forms of insurance

The most common types of insurance are Professional Indemnity Insurance and Public Liability Insurance. Generally, Professional Indemnity Insurance can protect you from claims made against you as a result of any advice you provide your customers. If you’re a service based business, such as a lawyer, accountant, management or business consultant, plumber and more. 

Professional Indemnity Insurance can cover your business from issues associated with defamation, expenses related to claim investigations, legal costs and more. 

Public Liability Insurance, on the other hand, can provide you with protection from claims made against you in the course of running your business. This type of insurance is particularly useful for public facing businesses, such as a restaurant. A seemingly simple accident such as someone tripping over your restaurant floor can cause a significant amount of emotional and financial damage for you and your business if you are sued.

The importance of Directors and Officers Insurance

In its essence, D&O Insurance can protect you and your company’s leaders and their private assets from claims made as a result of doing your duties. Errors happen all the time, and the more responsibilities grow as a leader, the more liability you have. Time and time again, you will see headlines of large companies brought down because of errors in management and the lack of insurance to cover against it.

D&O Insurance can cover you or your leaders against claims as a result of issues such as:

• Competitor claims
• Litigation settlements
• Issues arising from mergers and acquisitions
• Failures to comply with government regulation
• Insolvency costs
• And much more

D&O Insurance can come particularly useful when starting an Initial Public Offering (IPO). IPOs are highly complex processes with numerous moving parts – an error in reporting during the roadshow, and companies whose stock pricing drops below the initial listing price, may result in the directors of the company being sued. 

Is D&O Insurance easy to obtain? 

The global COVID-19 pandemic, combined with numerous other factors such as natural disasters, have resulted in D&O Insurance premiums rising at an all time high. As D&O Insurance can be a necessity in many instances, this may put managers in a difficult position of being able to afford insurance premiums while improving the company’s cashflow. 

To further complicate matters, we are currently in a hard insurance market, which means insurers will be more conservative in their approach to providing cover.

This is where it can be useful to consult a licensed and qualified Business Insurance Broker. A Business Insurance Broker can help you avoid commonly marketing insurance ‘traps’ and fine tune broad policies to be more applicable to your situation. As well as helping you find hard to place cover, they will also be able to work with you to, in some instances, greatly reduce your premiums.