People and companies are not only accountable for their own acts or omissions, but also for acts committed by others and losses caused by products or goods they use or sell. For hundreds of years, the insurance industry has developed specific products to cover various kind of risks and liabilities. Our complex and ever-changing legal systems lead to the development of very sophisticated insurance products designed to cover the operational risks of companies, at all stages of their development process. The important insurances that startup companies must consider include those covering the directors & officers liabilities, the general civil liabilities, the professional liabilities, the liabilities for products, the liabilities towards employees and the tenants liability insurance.
(Photo by Crew on Unsplash)
Let’s start by focusing on the Directors and Officers liability insurance (D&O).
What is it ?
D&O insurances provides cover to the directors or officers of the company against liability resulting from wrongful acts committed in the scope of their duties. Policies will generally pay (or reimburse) the individual (or the company) for the costs associated with the defense and investigation of the claim, as well as pay the damages for which the directors and officers are held liable.
Liabilities may occur in all the instances where the director or offices makes a decision that negatively affects either the company or a third party, no matter which legal form the company has taken.
Even though the insurance is taken out and paid by the company, it is there to protect the personal assets of the directors and officers. Legal costs of defending against claims can in some instances be hugely expensive, especially for natural persons.
Current policy forms usually have a broad definition of director & officers, which potentially includes any person whose personal responsibility and liability is engaged for wrongful managerial acts, such as conducting officers, founders, independent directors, trustees and even employees receiving a specific delegation from the board and therefore considered as “de facto” directors.
The territorial scope is also broadened to include all the jurisdictions in which claims may be introduced against the insureds, including the United States of America.
Finally, insurers now offer powerful extensions such as coverage for informal regulatory enquiries, costs to restore the reputation, bail bonds expenses, family related costs, additional insured limit at no additional costs for independent directors, payment of administrative fines and penalties, psychological support after a covered event, and many others.
What are the type of claims?
Claims against directors are brought by various sources, including owners, investors, lenders, employees, securities holders, customers, consumer groups, competitors, business partners, government authorities or regulatory bodies. We have recently dealt with claims from:
- the National Social Security Authority, to recover indemnities from directors who failed to prevent work incidents;
- the tax authorities, to recover unpaid corporate taxes;
- the competition authorities, for alleged antitrust law violations;
- regulators, for late filling of financials or breach of compliance rules;
- environmental agencies, for alleged pollution;
- employees, seeking additional compensation after a work accident, and alleging that the directors failed to put in place adequate procedures to prevent incidents;
- employees, for non-appropriate work environment or practices (harassment, wrongful dismissal …);
- customers, complaining on the products sold or services provided. They sue directors in order to put pressure on the company and get a more favorable indemnification;
- competitors, for unfair practices.
Is this really relevant for startups?
Directors and officers’ liabilities are probably not at the forefront of your mind at the beginning of the company’s development. Yet, we believe it is important to consider appropriate D&O insurance since the very first moment.
Many important, strategic decisions are indeed taken in the first months and years of a company activities. A late subscription could potentially exclude from coverage the damages and other consequences that arise out of those decisions you made.
