Being successful as an entrepreneur involves many obstacles, from raising capital for your startup business to finding customers and maintaining customer relations. To stay competitive in today’s environment, company management often have to make tough choices that could leave them open to legal action.
Have you considered how your business would respond if one of its key executives faced legal proceedings? Most small businesses fail to plan for such contingencies, which is one of their greatest mistakes – on average companies spend $1.2 million annually fighting litigation cases, according to U.S. Chamber of Commerce figures. That’s an eye-watering amount.
As a small business already on a shoestring budget, how do you fight litigation? That’s why directors and officers (D&O) insurance is vital for all small businesses. Not only does this insurance coverage protect the company, but it also covers the legal costs and potential settlements associated with directors’ and officers’ claims.
In this guide, we’ll explore the advantages of the directors and officers insurance policy for small businesses.
Directors and Officers Insurance: An Overview
Directors and officers (D&O) liability insurance provides protection to directors and officers of organizations from claims that may arise as a result of actions or decisions taken as part of their duties. This type of insurance policy protects the personal assets of top-tier executives by compensating them for legal defense costs and settlements arising from litigations.
Almost all major firms have D&O insurance as a part of their risk management strategy. Unfortunately, only a handful of small businesses invest in this type of insurance coverage. However, considering that even small businesses aren’t immune to potential lawsuits, you must purchase D&O insurance. This policy will protect your business and top-tier executives from the financial damages associated with lawsuits.
How Directors and Officers Insurance Can Help Small Businesses
Here’s why investing in D&O insurance will prove beneficial for your small business:
#1 Offers Legal Cost Coverage
No matter the size or scope of a business, its board of directors plays a central role in making key business and policy decisions while the executive officers oversee implementation. Should any of their decisions offend the stakeholders or employees, they will face legal action.
Lawsuits filed against directors and officers vary, from minor grievances filed by dissatisfied employees to large claims filed by the shareholders. In both cases, one thing is for sure: your finances will take a hit. Considering that small businesses have limited access to cash, legal expenses will put you out of business.
Fortunately, you can protect your business’s financial stability by purchasing D&O insurance. This type of insurance policy offers coverage for the personal liability of directors and officers arising due to improper acts in their managerial role.
Oakwood D&O Insurance notes that D&O insurance covers the cost of legal defense, prospective settlements, and judgments associated with lawsuits. Therefore, it’s a must-have for all small businesses.
Before purchasing a D&O insurance, it’s essential to learn more about the policy and the coverage offered. That way, you will be able to choose the right coverage for your small business.
#2 Attract Better Talent
Top talent drives productivity and innovation by frequently articulating new ideas that change the course of the firm. However, attracting top talent in a highly competitive market is difficult for small businesses.
One way you can attract the best of the best is by offering D&O insurance. This insurance coverage acts as a financial safety net in case a lawsuit is filed against your directors and officers.
For many top-tier executives, D&O insurance plays a crucial role in determining whether they should accept a job offer from a company. It makes sense: directors and officers feel confident when it comes to decision-making, as they know their decisions are backed by D&O insurance coverage.
Without D&O insurance, your top-tier executives may not be able to make the right decisions due to the fear of the outcome associated with them. Having D&O insurance in place will omit this fear, which is why you must invest in it.
#3 Attract Potential Investors
Access to finance is essential for every business to expand its operations and succeed in the competitive market. Your small business is no exception. To grow in the industry, you will require external sources of funding.
Often, investors prefer funding companies with D&O insurance because they want their investments to be protected. A company with D&O insurance coverage appears attractive because its assets aren’t at stake when it faces a lawsuit.
Hence, investing in D&O insurance coverage will make it easy for your company to secure funds from investors.
As no business is immune to litigation, a D&O insurance policy is a necessity for small businesses. Besides acting as a safety net, this coverage attracts top talent. Not only that, but it also empowers leaders to make critical decisions without the looming threat of personal liability.
When buying D&O insurance, always choose a reputable insurance provider. Make sure to check reviews online on their website and third-party sites. Also, don’t forget to ask what isn’t included in the policy so that you won’t have to deal with surprises later.