Directors and officers insurance acts as a valuable risk management solution, especially for the SME segment. Read more to know the benefits of the same.
A well placed D&O liability insurance protects the senior assets of the company in the event they are personally sued by third parties for any alleged or actual error, misstatement or breach of duty. Sometimes the coverage is extended to the entity itself if it is named in securities claims. It also covers the cost involved in defending the claim which can exceed the cost of settlement many times. D&O cover has become an integral part of public limited and large multinational companies’ corporate risk management. When it comes to small and medium-sized enterprises, most of its business executives are likely to be under the perception that D&O policies are for large-scale businesses.
Do SME’s need directors and officer’s liability insurance cover?
Keeping in mind the changing operational landscape, most probable answer is ‘yes’. Here are few reasons which make D&O insurance policy essential for companies of all size and shape.
- Directors and officers liability insurance aren’t just for publically listed and larger companies. In fact, small and medium-sized companies are far more vulnerable to litigation related financial havoc unlike larger companies with more resource and funds availability. If your company is a smaller one with only a few shareholders, you may presume that directors and officers insurance coverage is not needed. Unfortunately, your presumptions may prove you wrong.
- Business executives of small and mid-sized companies can be held accountable for various external exposures. Business does not need to have shareholders for its key personnel to get personally sued. Lawsuits may arise from many different sources like vendors, customers, government agencies, employees and other financial investors if you are seeking to raise venture funding. In the current legal and economic environment, every business is exposed to executive liability.
- Umbrella policies or general liability insurance policies usually do not cover executive liability lawsuits.
Benefits of D&O policy for small and medium-sized enterprises
To raise venture funding
Having a D&O cover is a plus point for any small and medium-sized business to raise funds via angel finance, crowdfunding or through a venture capital. Investors would often consider the safety of their investment in case some managerial decisions go wrong.
Financial cushion for novice mistakes
In most of the cases, small and mid-sized companies are likely to have novice directors on board. Less experienced management is more likely to do beginners mistake such as breach of fiduciary duty, overlooking minor regulatory statues and many such flaws. Directors’ and officers’ insurance policy can protect you from personal financial losses as you get a certain degree of financial support.
Protects your wealth
In case of SME’s, Even though claim frequency is low in small companies, the impact can be financially heavy to the extent of losing your wealth. Risk scenario may vary from legal action by employees to investigation by a regulator. It’s better if you are well prepared for the risk.
Let’s consider a risk scenario. Let’s say a company decides to downsize and lays off some employees. In this case, an employee may put an allegation on management and personally sue a director on the grounds of discrimination which is not the actual reason for termination. Such litigations that need to be defended becomes a personal liability for a director. D&O insurance covers such claims and protects the personal wealth of the director.
Conclusion
The rise of regulations and emerging risk in the operating environment makes it imperative for small and mid-sized enterprises to buy D&O liability cover. Irrespective of the size of the company, directors are a potential target of lawsuits which can ruin their financial health. It’s better to prepare yourself for unexpected. Insurance specialists can help you analyse the scope of coverage required for your business to protect the leaders of the company against a wide range of claims.