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When should my growing company bring on D&O insurance?

Michael Jameson's Profile

My company is growing, recently funded, and recently brought on a board with outside members. I got a quote for D&O insurance and before moving on it I just have to ask: when is the "right" time to start D&O insurance. It's not so obvious to me, and in this environment, where I am looking at every dollar we spend every day, is it money well spent? I asked around and not only has noone I know ever had to use their D&O coverage, they don't even know of anyone who knows of someone who has had to use it. I'm sure it happens - this is insurance, a "just in case" product if there ever was one - but it seems to me that the risk is far greater when the company is bigger, not in the earliest days. Anyway, just my wondering on the subject. Does anyone have any rules of thumb, guidance or experience in dealing with a situation that required D&O? What would you do? Buy it or hold off? And don't worry, I hereby release anyone who answers from any liability :)! I'm just interested in the wisdom of the group.

Answers

(Agent, JKS Solutions, Inc.) |

My company is in a similar position. Our outside directors have an expectation that the company will put this coverage in place in the relative near future after we accomplish some more immediate priorities. We look a that coverage as a risk management tool that is appropriate for a company that is growing and has more interested parties involved (officers, directors, shareholders, etc). If your outside directors have been involved as investors or outside directors in other companies, they likely have an opinion and it should be discussed at the BOD level. We have found that our outside directors, which have 'been around the block' so to speak, a few more times than management have provided good counsel on such matters.

The last time I reviewed an application for a D&O policy, the inquires where fairly extensive and dealt with various internal control and governance aspects of the company. It was apparent to me the insurance company was extensively screening applying companies to determine if there were risk factors that would indicate a higher risk for the insurance company. The application reminded me of the 'higher bar' that has been put in place by our lenders as we have attempted to maintain our credit lines over the past couple of years and my take-away was not to assume that application process would be easy or that obtaining coverage was assured.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

If you are bringing on outside directors at some point having D&O versus not having it will be a gate for getting good directors (or good
officers for that matter). I do know of situations when the coverage was used both in public and private situations. If you ever get sued, even if you think the suit is frivolous, you will be happy to have it.

J Roy Martinez
Title: CFO/Controller
Company: In Career Transition
(CFO/Controller, In Career Transition) |

Any outside Board member worth having on the Board should know to insist that you have D&O insurance.

They might not remember to insist...but the company should do it anyway. You don't want to betray their faith by not protecting them. It is most likely the D&O will never be used...but you might REALLY burn that bridge if they learn you did not cover them. Of course...it will be even worse in the unlikely situation if the directors get sued and they are not covered.

Just suck it up and spend the money. It will probably be around $5K.

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

I agree with the other respondents - almost a necessity as soon as you have a Board comprised of non-employees. However, D&O is not just for outside directors or officers. "Officers" really extends down to just about any employee who may get individually included in a lawsuit. An engineering friend was hired away from Nuance by Yahoo and even though he made no contact with his team after he left, many of them contacted him and asked to join him at Yahoo. Lawsuits were filed against Yahoo and him individually, and fortunately the D&O Insurance kicked in to cover his costs of defending him personally.

Talk to an experienced broker. I've seen some policies with higher retention limits as low as $2K...

Daniella Lombardo
Title: Enterprise Risk Manager
Company: Specialty P&C Insurance Company
(Enterprise Risk Manager, Specialty P&C Insurance Company) |

I'm assuming your company is privately held as you said you just got funding. Typically any outside directors require the coverage be in place before they agree to serve so that usually is the time companies purchase it. As a private company the exposure is obviously far less than if you were public. Your company must be growing if you've just gotten funding. Are there shareholders who are not D&O's? That is another thing to look at. Also, private company D&O can (and should be) bought in combination with EPLI (employment practices liability) coverage. Does your company plan on having any private placements? There are exposures here that can be covered. Does your company plan on going public at some point? If so you want to have coverage in place prior to going public (or filing to go public) as you'll want coverage for the Prospectus and you are in a much better position to negotiate terms, conditions and coverage with a carrier if you already have coverage with them. I have 18 years experience in D&O - I have been an underwriter, a broker and a consultant. If you'd like any further advice or have any questions I'd be happy to help you off-line.

Randy Rutledge
Title: CFO
Company: Big Earth Networks, LLC
(CFO, Big Earth Networks, LLC) |

Think Daniella summed it up perfectly, but at any rate it is a BOD decision in my opinion. Only use one broker because the universe that writes D&O is very small. Also consider E&O. It does need to be purchased and in place before there is a need. Once it is in place it is much easier to continue than to try and obtain it when the business becomes more complicated. Underwriters consider growth a risk factor.

Ray Calabrese
Title: Treasurer
Company: Interim Treasurer
(Treasurer, Interim Treasurer) |

I agree with all above, but would add that if your compnay faces the risks that can be protected by D&O insurance, then the time is right. assuming you're private the comment about EPLI is a good one. This is the primary risk that D&O would cover in a private company.

Also, if you're planning a public offering, its good to let the underwriters get to know you. This costs money but it can make for an easier time when you try to get D&O for a public offering.

Jeremy Sanders
Title: Vice President of Finance & Operations
Company: Ideator, Inc.
LinkedIn Profile
(Vice President of Finance & Operations, Ideator, Inc.) |

Adding to the other responses, I'd say that it's important to look into exactly what D&O covers. The idea here is that you might learn that it's not quite the insurance you thought, it's perhpas more critical to your business than you realized, or something else. It's important coverage to have, but you can better understand the coverage to help you decide when it fits into your budget and your overall strategy.

Casey Roach
Title: Senior Managing Director
Company: TD Wealth Management 'in-between"
(Senior Managing Director, TD Wealth Management 'in-between") |

Others have covered the waterfront on this issue. My only comment is you need to get quotes sooner rather than later. The key is to ensure you use a respected broker who can negotiate on your behalf and is well versed in the subject.
Based on current economic circumstances, be prepared for a significant disparity in the quotes. If I can provide you with a good insurance company as well as a reliable broker, let me know.
Casey

Topic Expert
Rex Jackson
Title: EVP and Chief Financial Officer
Company: JDS Uniphase
(EVP and Chief Financial Officer, JDS Uniphase) |

Agreeing with the string here. The only way I would consider not getting this coverage at your stage is if the board makes a fully informed, explicit decision not to secure coverage. When asked, I would expect them to insist on it.

Agree with finding a good broker. If you can, try to consolidate your insurance needs with a single broker to improve leverage, which may mean a move from a current provider since not all firms handle this type. With any luck, you can also line up policy periods to save recurring headaches during the year. Finally, once consolidated, keep your broker honest by re-bidding the portfolio of coverages annually, or at least every other year.

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