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D&O Insurance

8 Benefits of D&O Insurance for Startups

India is witnessing a huge enthusiasm in the opening of start-ups. There are many businesses beginning their journey in various domains. The start-ups are in the tech fields in several cases. There are numerous start-ups in the manufacturing sector. One of the important aspects of successfully running a start-up is considering corporate insurance.

In simple terms, a start-up is a private business, led by a person or a group of individuals. It requires corporate insurance to remain stable in the long run, just like any other private company. 

D&O insurance for Startups

D&O insurance policy is a suitable insurance package for an Indian start-up. The main objective of the policy is to protect the personal assets of the directors/senior executives of the start-up against lawsuits, alleging them of malpractice or non-compliance of duties in some form. 

Let us understand the policy better before considering how this insurance will benefit Startups.

Directors and Officers (D&O) Insurance provides for financial protection in the event of a claim alleging a wrongful act in a managerial or supervisory role of the director, or an of- ficer in the organisation.

Types Of Coverage:

A typical policy provides three forms of protection as standard, as outlined in its insuring agreements; Side-A, Side-B and Side-C.

Side-A: Directors and officers liability

Side-A, also known as directors and officers liability, is the first insuring agreement of a D&O policy. This coverage protects executives from claims when corporate indemnification is not available from their organisation.

Under Indian law, a company cannot indemnify directors. However, it may obtain D&O in- surance for its directors and other key officers. Side-A coverage plays an important role in protecting individuals when this financial support is not available. It provides an essential last line of defence, ensuring that their assets remain safeguarded from the consequences of personal liability.

Side-B: Corporate reimbursement

Side-B, also known as corporate reimbursement, is the second insuring agreement of a D&O policy. Side-B reimburses an organisation for the expenses it occurs when defending its management in accordance with its corporate indemnification obligations. Side-B cov- erage supports an organisation financially when it is, in turn, supporting its management.

Side-C: Entity securities coverage

Some D&O policies also include a third insurance agreement, Side-C, also known as entity securities coverage. Side-C coverage is typically reserved for publicly listed companies and protects the corporate entity from its own liability exposures. The coverage provided by Side-C is limited to claims made against a company as a result of the offer, sale or purchase of its securities; in other words, the shares listed on the stock market available for purchase by investors.

In addition to the above, the two most common coverage available for Startups in particular include employment practices liability

Employment practices liability

Employment practices liability insurance (EPL) protects an organisation from employment- related claims. EPL ensures that the entity is covered for its own defence and settlement expenses if an employee makes a claim against it. While EPL is often available to large organisations on a stand-alone basis, it may also be attached to a D&O policy as an op- tional insuring agreement, for the payment of extra premium.

Types of losses paid under a D&O insurance policy

  • Defense costs–Legal expenses and costs, which the company is legally liable to investi- gate, defend or appeal a claim. Defense costs also include Bail bond and civil bond ex- penses. “Defence Costs” shall not include the remuneration of any Insured Person, cost of their time or overhead or any other costs of any Company.
  • Public Relations expenses – Costs incurred to retain a public relations consultant to re- duce or prevent negative publicity.
  • Extradition costs – Costs to have a legal adviser or tax consultant towards advice on ex- tradition proceedings.
  • Emergency costs advancement – In the event of defense costs trigger, the company can also request for payment of defense costs on a retrospective basis.

Benefits for Startups

The main benefit is the insurance policy covers the legal expenses of the lawsuits that are filed against the directors/officers of the start-up. The start-up or the accused does not have to pay anything to fight the case as the insurance amount takes care of it.

Benefit 2: The nature of business does not matter

It does not matter in what domain that start-up operates. It can be finance, textiles, heavy machinery or anything else. As long as the start-up is legally registered and has all the relevant licenses, the D&O policy holds for it.

Benefit 3: The scale of the start-up does not matter

Another interesting benefit is the scale of the start-up is not a factor while availing the D&O insurance policy. The start-up can purchase the policy without remaining worried about the scale at which it operates. The insurance policy will still be applicable.

Benefit 4: Protecting any kind of personal asset

Yet another crucial advantage of the D&O policy is it is incredibly effective in shielding the personal assets of the start-up directors and officers. They do not have to remain bothered about spending anything from the assets they have to fight the lawsuits.

Benefit 5: Protecting start-up assets

Angel investors can file a lawsuit against the higher management of the start-up when not convinced with their returns. In such cases, the assets of the company can take blows. Here lies the importance of D&O policy. It effectively protects the assets of the start-up. 

Benefit 6: Easy processing 

While buying the insurance policy, you will find it very convenient to pass through the processing stages. Purchasing the policy from a trusted insurance broker is very easy. It does not take time and you can save resources during the procedure. 

Benefit 7: Can also protect future directors

One of the amazing features of the D&O policy is it also has the provision to protect the assets of future directors of the start-up. The policy document of the insurance clearly mentions such a provision. It is applicable when the future directors are named in a lawsuit.

Benefit 8: Affordable premium amounts

The start-up does not have to worry too much about the premium amounts. A top broker arranges for policies that have competitive premium rates. There is no problem in managing the insurance budget. Paying the premiums periodically does not have any issues. 

Exploring the policy

It is important to thoroughly explore the different sides of the D&O insurance policy. Discussing it with the broker is an intelligent step. When you are aware of its features and applicability, along with the list of exclusions, you become more confident to purchase it.

You can consult with PlanCover, which has already earned a good name in the industry for consulting Startups and growing companies with risk management and insurance placement services.  They are a broker and have a team of experts who can explain to you the benefits of the policy for start-ups, especially in India. 

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