By the looks of it, a D&O insurance policy can appear like it was catered to big-wigs running those large companies working in high-rise offices in a metropolitan area. After all, the coverage for legal assistance it provides is quite large and seemingly beyond the scope that most small and starting companies have to deal with.
However, this could not be farther from the actual truth. The reality is that personal liability cases do not care how big or high-profile your company is. So as long as your directors have the potential to be held personally liable for their actions, they will be.
So, are D&O policies meant only for big companies? The answer is one resounding NO.
Why Do Startups Need D&O?
Don’t ever think that the relative size and youth of your business is going to make you exempt from legal problems. The truth is that it’s not the size that is going to make you more liable to civil and criminal charges arising from decisions made by the board or an officer, but inexperience.
Here’s the thing: startups and small businesses are often being run by first-time business owners or first-time directors/officers. And with inexperience comes the potential to make “rookie mistakes”. As a matter of fact, first-time business owners tend to make certain mistakes such as:
- Overpromising to Investors
Ever had that business concept that you thought was so fool-proof that you actually hyped it when presenting your potential investors and shareholders? This is something that novice business owners tend to do.
Look, there is nothing wrong with hyping up your business. If that business concept is actually quite innovative and it works, your investors are going to love you for it and pour more funding into it. However, if that concept fails or even the expectations you set are not met, those investors could quickly turn their back on you and sue.
- Breaches of Fiduciary Duty
What is a breach of fiduciary duty in the first place? It might sound like this fancy legal term (it is), but the concept is quite simple. A fiduciary duty, in its simplest terms, is any obligation you have to uphold the interest of one other party first and above your own. For instance, directors have fiduciary duties to their shareholders and officers have fiduciary duties to executives and directors.
Fiduciary duties exists only when one party has a special relationship with another which, in the context of this article, includes a shareholder-director relationship. As such, breaches in fiduciary duties are merely every action that you may make that seemingly violates the trust that parties have entrusted on you by virtue of the position you hold. It’s a fairly bold concept, really, but you’d be surprised how many civil actions have arisen out of this point alone.
- Overlooking Statutes
Remember the phrase “Ignorance of the law excuses no one”? That extends to directors and business owners as well. In this day and age, ignorance of the law does not exactly mean that you don’t know that such laws exist but that you are not aware of the extent of their reach as far as your business is concerned.
For instance, you may be elected to forego certain year-end bonuses from your employees, thinking that they are merely optional for the business. However, you only realised that such bonuses were actually mandatory under the law. Unless you find a way to rectify your mistake a soon as possible, you may end up facing a lawsuit for unfair workplace practices.
This is where having sound legal advice would become important and it’s best that you find a good lawyer to help your business in its early phases. This should prevent you from creating errors out of misinterpration of the law in the first place.
- Interpersonal/Management Mistakes
Workplace politics is a rather delicate matter and many novice business owners and directors have yet to develop the tact needed to diffuse tensions there.
For instance, you might get too chummy with your employees and suddenly made an off-hand comment on one unsuspecting worker, offending them. Or perhaps you were in the wrong mood that day and started berating an otherwise innocent employee who got in your way.
Depending on either of these circumstances, you might get slapped with a harassment lawsuit. This can be further exacerbated further if said employee was of a gender or race different from you.
What you have to understand is that there is no shortage of reasons for directors to get sued in the effort of running a business. You as much as enter a deal without making sure that you can uphold your end of the bargain and you get sued. Not thinking your interactions through with your employees and you’d get sued. Act in a way that gives the impression that you are throwing the rest of the creditors and investors under the bus and you’d get sued.
Other Compelling Reasons
Aside from general inexperience and incompetence on a director/officer’s part, there are other reasons why small private businesses have to get a D&O policy.
- Private Companies are As Likely to Face Suits as Public Ones
Again, lawsuits do not care how your company is traded or how big it is. So as long as there are people there whose actions can impugn on the rights of others, there is always a potential for a lawsuit to being filed against these people. In fact, survey finds that 33% of private companies around the world have lost considerable portions of their money due to lawsuits.
- Directors and Officers are Uniquely Liable
The position of a director and an officer are not covered by labour laws but in corporation law. This means that most of their lawsuits are not going to be labour-related but most likely corporate in nature. Depending on the case, this prevents them from being covered by typical liability insurance plans.
Also, due to the size of your business, your directors and officers might take on roles that are beyond the scope of their primary duties as officers and directors. This tends to complicate matters as courts have to determine to which office that a person held at that moment the action or omission occurred should the lawsuit be filed at. Depending on the case, this can lengthen the proceedings and, in turn, increase expenses.
- The Stakes are Comparatively Higher
As is the nature of the business, there is a chance that directors, executives, and officers would have personally invested their own money in keeping a private company or small business running. This means that lawsuits, as expensive as they are, will severely hurt the finances of the business even during the pendency of the case.
This is even worse if the director loses and is ordered to pay for damages. Without coverage, that director’s loss will also be felt by the company. In other words, smaller companies are at larger risk of being devastated financially with a lawsuit compared to a company with larger resources.
- It Helps Sweeten the Deal
A D&O Insurance, aside from providing you enough financial coverage in lawsuits, can also act as an extra form of credibility. Supposed, for example, you turn to venture capitalists to get funding for your business.
Now, these investors have their own standards in determining whether your proposal is feasible. But one major factor that could swing their decision into your favour is they can see something that can protect their investments in worst case scenarios. And that’s what exactly a D&O insurance is.
- It Incentivises the Hiring Process
Looking for executives (really good ones, at least) is hard nowadays. It’s either your salary for them is too low or the work you have to for them is too stressful for the paycheck.
However, you can draw potential hires for your executive team with the right kind of incentives. A D&O policy sends the message that your company can provide for the needs of executives when they become personally liable for any actions they do on behalf of it. This way, they can focus on their work and need not worry about having to spend their own money clearing their names in court.
Are D&O Policies Accessible to Small Businesses?
There’s this notion that D&O insurance is expensive since it can provide coverage for legal fees for as much as £1,000,000. That should mean that the premiums for policy buyers should be expensive across the board, right?
The truth, however, is that there are D&O policies are actually scalable. What that means is that policy providers today are also taking into consideration the size, financial stability, and type of industry that a company operates in when providing policies to them. In essence, the smaller and less financially secured a company is, the less expensive their D&O policies will be.
The premiums could run between £100 to £500 per year depending on the type of policy being purchased. However, the coverage provided should be enough to assist a small company on attending to their legal problems.
Do you think that small businesses should have their own version of a D&O Policy? What other reasons can you think for small businesses to get their own policy? Let us know in the comments section below.
