A D&O claim can cost your SaaS company millions, or even tens of millions of dollars in damages. A recent report by the trade journal Business Insurance indicates that D&O claims are becoming more and more prevalent.
When leading a SaaS company, C-suite officers and board members are exposed to risk. They may be named in a civil suit against the company, putting the business entity and their own personal assets at risk. With Directors and Officers (D&O) Insurance, you can transfer that risk from your company and company leadership to your insurer.
What Is Covered By Directors & Officers Insurance?
Legal fees, judgments, and settlements may be covered by D&O insurance for board members and company leadership in the event of lawsuits related to their specific job duties. This includes but is not limited to regulatory issues, alleged non-disclosure, negligent corporate governance, mergers, and acquisitions.
A fiduciary breach can also be covered if a stakeholder, including customers, suppliers, or government regulators, believes that the board’s decision caused financial losses or bankruptcy. For example, an investigation might be launched or fines might be issued if a stakeholder believes that the board’s decision caused a loss.
When one of these claims arises, the company as a whole and one or more board members are usually named as respondents. Whether or not the claim has legal merit, defending against it is costly. Settlements and judgments are so costly that you must be insured.
Do The Board And C-Suite Want Different Things From A D&O Policy?
There can be a conflict of interest between founders, board members, and investors when selecting a D&O policy. When selecting a D&O insurance policy, there are typically three distinct aspects, side A, B, and C. Directors and officers may be covered slightly differently on side A and B. Side A covers directors and officers for expenses that the company cannot cover, whereas side B allows the company to recover the expenses for board members or officers covered by the company.
However, Side C, which is known as Entity Coverage, protects the company itself from losses usually connected to securities litigation and negligence. Sides A–C transfer risk in different ways, but they are all covered by the same insurance policy. If a suit names the individuals and the corporate entity as co-defendants, policy limits still apply. When more money is spent to cover the corporation, there are normally fewer funds left over to cover the individuals.
Individual directors can purchase a “Side-A-Only” policy to further protect themselves while leaving more of the company’s D&O policy to cover the company.
Is Key Person Insurance Included In My D&O Policy?
Key person and D&O insurance are two different policies.
Key Person Insurance is a type of business life insurance policy. An important person dying suddenly can cause uncertainty about the company’s future. Particularly investors and stakeholders might worry about whether the company will survive. The beneficiary of a life insurance policy is usually a spouse or child; in a Key Person policy, the beneficiary is the company.
A company that is in financial distress can use those funds to recruit, hire, and train a new “key person”. If no one can take on those responsibilities, the funds can also be used to fulfill financial obligations to creditors, investors, and employees before closing down.
What Are Some Things Directors and Officers Insurance Doesn’t Cover?
There are several common restrictions contained in many D&O policies unless otherwise stated in your policy. While D&O typically does not cover claims that are more appropriately covered under another policy—whether you have that policy or not—there are several common restrictions. For example, D&O does not typically cover data breaches (Cyber) or discrimination claims (Employment Practices Liability).
Unforeseen events that result in financial loss are the purpose of D&O insurance. If a claim is in progress before the policy’s effective date, you are aware that it is coming, or the incident that spurred the lawsuit occurred before the policy was issued, it is referred to as ‘Prior Acts.’ While some policies cover prior acts, they are the exception, not the norm.
In some D&O policies, “Major Shareholder Exclusion” clauses exclude coverage for individuals who own more than a set percentage of the company. When evaluating what your policy covers, be aware of such exclusions. Avoid them whenever possible.
When Should Your SaaS Purchase Directors and Officers (D&O) insurance?
An investor or potential board member may ask you straight up how extensive your D&O coverage is if you approach them for funding. Having the policy ready in advance lets your investor know that you take risk seriously and are willing to protect their assets.
Your board’s choices might be challenged by venture capitalists and investors, who want a return on their investment. With adequate D&O insurance coverage, they will still be able to recoup their investments, no matter what financial troubles your company faces.
A D&O insurance policy gives your company less risk, making it a more desirable investment.
SaaS Company D&O considerations before a merger or acquisition:
Founders are 16 times more likely to be acquired than to go public, so you will require Runoff Coverage, which allows you to report claims that occurred on or before the acquisition date after the acquisition date has passed (ranging from months to years). If something like that were to stand in the way of a finished deal, it would be terrible!
How Much Does D&O Cover and How Much Does It Cost?
Answering this question depends on the amount of risk your company and board are facing. As your company grows, so does the risk. As you gain new investments, acquisitions, launch products, and reach new milestones, your insurance needs continue to change. Make sure your insurance policy still covers everything you require as your company continues to evolve. You should know if you need to make adjustments right away, within a certain timeframe, or when you renew your insurance policy.
Your premium may be affected by your age, financial position, location, and a host of other factors just like other insurance policies. While there are many ways to mitigate risk and lower your overall costs as well, one of the easiest ways is to select a board and management team made up of more experienced and knowledgeable individuals. If you approach them with your D&O policy already in place, you may lower your premium. If you have a history of financial stability and growth, you may also lower your premium. Make sure to consult with an insurance professional to help you optimize your policy and keep your costs down.