Everything You Need to Know About Directors and Officers Insurance (D&O) in New York
D&O insurance is not an insurance policy required by New York State law.
However, it’s usually required by investors or other board members.
Regardless of who’s requiring or asking you to purchase, D&O insurance is critical to your insurance stack.
D&O is one of the few insurance policies that actually protect the company decision makers, which is why it is often grouped into a type of policies called Management Liability.
What is D&O Insurance?
D&O is an management liability insurance policy built to protect board members, directors and officers of the company.
A D&O policy can also provide coverage to the corporate entity, but the primary coverage is for the individual decision makers.
In the simplest form, it protects against wrongful accusations and acts of the fellow directors and officers of the company.
What is covered?
Common covered losses include: anti-trust and unfair competition, as well as lawsuits brought against an individual director or officer of the company for mismanagement.
Defense cost can also be covered for frivolous suits brought against the board members and officers.
Critical: A good D&O policy is written on a Duty to Defend form. This means that 100 percent of defense costs are covered as long as some portion of the claim is a covered loss. Since it can get confusing which types of situations might result in a claim, here are a few recent claim examples:
Misrepresentation: Startup agrees to the sale of the business. However, during the Run-Off period, the purchasing company claims the board on the startup withholds crucial information to the sale of the business. The defense costs alone exceed $2 million.
Investors: Startup business takes on investors after dismal profits for the investor. Suit is brought against the company alleging the directors and officers diverted profits to avoid distribution. Settlement and defense exceed $500,000.
Investors: The original founders of a business allege the venture capital firm diluted the founders shares by self-interested and grossly unfair terms. Once the business sold the original founders file suit after a less than satisfactory exit. Defense costs exceeded $250,000.
Trade Secrets and Intellectual Property: Company A hires an executive from company B. Company B alleges they have suffered irreparable and immediate injury as a result of trade secrets and intellectual property. Company B files suit against company A and new hire. Company A exceeds $350,000 on defense and settlement.
What’s not covered?
Typical exclusions are for things like, Fraud, Kickbacks, Bodily Injury and Insured vs. Insured (meaning your company can’t sue itself to collect insurance)
How much does D&O Insurance cost in New York?
Policies costs vary based on the revenue and total assets of the company.
Typically, you are looking at a starting premium of $500 rising with your total revenue and assets.
Why do you need it?
Most often, companies become aware of the need when an investor requires it.
If you don’t have it, an investor will bring his or her business elsewhere, due to the fact that they themselves will sit on your board and want to be protected.
More importantly, the average D&O claim costs nearly $400,000 in defense costs alone. Not having proper coverage can sink your startup.