Why What Is D&o Insurance Isn't What You Think

What is D&O Insurance? A Practical Guide for Startups

Directors and Officers (D&O) insurance protects the personal assets of board members and executives when they’re sued for governance decisions. It’s a claims-made policy: coverage applies to claims reported during the policy period and the retroactive date, not solely to when the alleged act occurred. For startups, D&O helps recruit experienced directors, reassure investors, and manage governance risk within a defined budget.

D&O insurance turns governance risk into a budget line and keeps leaders’ personal assets out of the crosshairs. A D&O policy is claims-made: it protects a company’s leaders—and often the company itself—against lawsuits alleging mismanagement, breach of duty, misleading disclosures, or other governance missteps.

What D&O covers (and what it doesn’t)

Covered examples:

• Alleged breach of fiduciary duty
• Misleading investor disclosures or governance disclosures
• Errors in governance processes, including cap table mistakes
• Fundraising and executive hiring errors

Not covered (typical exclusions):

• Fraud or intent to deceive proven in court
• Bodily injury or property damage
• Routine vendor disputes or IP disputes not tied to governance claims

Policy drafting levers:

• Add a dedicated Side A/DIC endorsement as investor count and outside liabilities grow.
• Include a clear priority-of-payments endorsement to allocate limited proceeds; Side A remains protected in insolvency scenarios.
• Side C (Entity Coverage) focuses on securities-related claims; it doesn’t broadly cover unrelated vendor or IP disputes.

Real scenario: A seed-stage SaaS company faced potential action during a bridge round; timely counsel reporting helped keep the dispute within the active policy period, enabling coverage defenses.

Sides A, B, and C — what each pays for

• Side A: Protects individuals directly when the company cannot indemnify directors or officers (common in insolvency).
• Side B: Reimburses the company after it indemnifies directors and officers.
• Side C (Entity Coverage): Protects the corporate entity, typically for securities-related claims.

Policy drafting levers:

• Add a dedicated Side A/DIC endorsement as investor count grows.
• Use a priority-of-payments endorsement to ensure Side A protection in tight insolvency scenarios.
• Note: Side C focuses on securities/corporate claims; it does not broadly cover unrelated disputes.

How the policy works (claims-made explained)

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A D&O policy is claims-made: the claim must be made and reported during the policy period and after the retroactive date to be covered. The policy in force when the claim is reported is the one that responds. Continuity of coverage is critical for startups that are fundraising or pivoting.

Key operational realities:

• Lapses in coverage can leave individuals exposed because claims-made timing matters as much as the act date.
• Underwriters evaluate stage, governance maturity, burn rate, cap table complexity, and recent financings when pricing D&O.
• Carriers expect timely reporting of demand letters, subpoenas, regulator inquiries, and similar notices.

Operational controls that lower price and risk:

• Calendar renewal 60–90 days out; never lapse coverage during fundraising or M&A.
• Seek full prior-acts coverage or negotiate a retroactive date that predates your first outside investment.
• Report potential claims early to help the carrier manage exposures from the outset.

Real scenario: A seed-stage startup received a notice of potential action during a bridge, and timely reporting preserved coverage for defense costs.

When to bind D&O (fundraising & board timing)

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Bind D&O before diligence broadens or before you add outside directors. Term sheets frequently require D&O as a closing condition. Underwriters quote better terms when you approach proactively with clean materials.

Timing rule of thumb:

• Bind before diligence goes wide — don’t wait for a leak or rumor.

What underwriters will request when you bind:

• Fully diluted current cap table
• Board roster and bios
• Charter/bylaws
• The last two board decks and investor updates
• Compliance policies (insider trading, code of conduct)

What to prep in one week:

• Updated cap table, board roster, the two latest board decks, two investor updates, and a short memo describing runway and any pending claims. Clear packaging speeds approvals.

Practical pitfall: Don’t wait until the week of close to shop coverage if D&O is a closing condition—start the process when you open the data room.

Pricing, limits, and negotiation levers

Key terms CEOs must understand:

• Limits: total payable under the policy per year/aggregate
• Retention: deductible per claim
• Retroactive date: prior acts coverage
• Priority of payments: order of payout when funds are limited
• Extended reporting period (tail): allows post-expiration reporting for acts during the policy period

Benchmarks by stage (ranges vary by carrier and sector):

• Pre-seed/Seed: often $1M–$2M limits; focus on Side A protection; higher retentions
• Series A–B: commonly $2M–$5M limits; Side C for securities exposure
• Late-stage: larger towers ($10M+) with Side A DIC for catastrophic protection

Cost drivers: sector, revenue volatility, burn, governance quality, and number of investors. Clean governance and consistent board cadence materially reduce premium.

Negotiation levers:

• Full prior-acts endorsement
• Severability and “final adjudication in fact” for fraud exclusions
• Defense counsel flexibility (panel vs. broker-approved)
• Priority-of-payments endorsement

Practical tip: Model limits against expected defense spend; a serious securities suit can require many months of defense costs.

Buying D&O efficiently (run a process like a mini-fundraise)

Use a broker who places with multiple carriers and understands venture risk; a good broker creates competitive tension and relevant case studies. Package underwriting materials clearly and concisely to speed placement.

Package checklist:

• Org chart, cap table, bylaws/charter, board minutes summary
• Financials, policies, fundraising materials
• Clear explanations of any outstanding claims or regulator contacts
• Confirm coverage for foreign subsidiaries and for Outside Directorship Liability where applicable

Extra edge:

• Ask carriers for pre-claim counseling benefits to use during tense moments
• Market-test annually but avoid yearly carrier-hops; continuity matters in claims handling

Real scenario: A growth-stage AI company improved renewal pricing after tightening board minutes and conflicts logs. When preparing renewals or midterm limit increases, tools that produce certified minutes and an audit trail help brokers and carriers see a clean record.

Governance changes that reduce risk (and premiums)

Insurance is the parachute; governance is the plane maintenance. Strong governance reduces claim frequency and improves underwriting terms.

Must-dos:

• Board hygiene: documented approvals and clear conflicts disclosures
• Equity clarity: single source of truth for cap table and option grants
• Communications discipline: annotate investor updates with risks and avoid absolute promises
• Policies: code of conduct, insider trading, whistleblower channel

Apply a decision framework (RAPID or similar) to material decisions and record who decided and approved in the minutes. Clear ownership reduces ambiguity in claims and helps underwriters see lower risk.

For deeper governance templates, see our startup governance guide.

Common myths and quick FAQs

• Myth: “We’re too small to be sued.” Reality: claims arrive during growth and fundraising; size isn’t a perfect shield.
• Mistake: letting the policy lapse during financing or M&A; lapses create coverage gaps.
• Myth: “Indemnification is enough.” Reality: indemnification is a contractual

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promise; D&O funds defense costs to satisfy that promise.

• Mistake: buying solely on premium; value often lies in policy language, defense support, and claims handling.
• Myth: Only large companies need D&O. Reality: startups with outside directors and institutional investors commonly require it.

FAQ

Q: When should a startup buy D&O insurance?
A: Bind D&O before adding outside directors or opening diligence; term sheets often list D&O as a closing condition.

Q: What does “claims-made” mean for my company?
A: The policy in force when the claim is reported responds; continuous coverage and a favorable retroactive date matter.

Q: Will D&O cover employee lawsuits like wrongful termination?
A: Employment claims often sit under EPLI; allocation depends on facts and policy language.

Q: Can founders get personal coverage under D&O?
A: Yes—Side A coverage protects individuals when the company cannot indemnify them.

Q: What happens if fraud is alleged against a director?
A: Many D&O policies include fraud exclusions, but defense costs may be advanced until adjudication; negotiate protections carefully.

Q: How much coverage does a Series A startup typically need?
A: Common ranges are $2M–$5M for Series A–B, with Side C for securities exposure and Side A DIC as investor count grows.

Q: Do I need a tail if we wind down?
A: Yes—an extended reporting period lets you report claims after termination for acts during the policy period.

Q: How do underwriters view cap table complexity?
A: Complexity increases risk; clean, documented cap tables reduce friction.

Q: Can limits be increased midterm for a fundraising?
A: Yes—often possible via endorsements or additional coverage; plan early to ensure coverage at close.

Q: What documents should we prepare to speed D&O placement?
A: Fully diluted cap table, current board roster and bios, charter/bylaws, two most recent board decks, two investor updates, and a runway/claims memo.

Glossary

Fiduciary Duty: The legal obligation of board members to act in the best interests of the company and its shareholders.

Claims-made policy: A policy that responds to claims reported during the policy period, not necessarily when the act occurred.

Side A coverage (Difference in Conditions, DIC): Coverage that protects individuals when the company cannot indemnify them.

Side B coverage: Reimburses the company after it indemnifies directors and officers.

Side C coverage (Entity Coverage): Protects the corporate entity for securities-related claims.

Retention: The amount the insured must pay out of pocket per claim before the insurer pays.

Retroactive date (Prior Acts): The date before which acts are not covered unless the policy includes full prior acts.

Extended reporting period (tail): Allows post-termination claim reporting for acts during the policy period.

Indemnification: A contractual promise to cover defense costs or liabilities of directors and officers.

EPLI (Employment Practices Liability Insurance): Separate policy covering employment-related claims.

Internal links: board meeting templates, startup governance guide