D&O Insurance Guide

Directors and Officers (D&O) insurance is a liability policy that protects the personal assets of corporate directors, officers, and board members if they are sued for wrongful acts while managing a company. It also covers the legal fees, settlements, and other costs the organization may incur as a result of such claims.

D&O insurance matters because directors and officers face personal liability for decisions they make on behalf of the organization. Without coverage, a single lawsuit could wipe out a board member's personal savings, even if the allegations turn out to be baseless.

Common claims covered by D&O policies include breach of fiduciary duty, misrepresentation of company assets, misuse of company funds, failure to comply with regulations, theft of intellectual property, and poaching competitors' employees. Claims can come from shareholders, employees, customers, regulators, competitors, or creditors.

For any company with a board of directors, whether a startup, a mature enterprise, or a nonprofit, D&O insurance is not optional. It is a foundational requirement for attracting qualified board members who expect protection for their personal assets.

D&O insurance typically comes in three distinct coverage layers, known as Side A, Side B, and Side C:

Many startup founders assume D&O insurance is something only large public companies need. This is a costly misconception. Startups face unique risks that make D&O coverage especially important.

Why Startups Need D&O Insurance

• Investor requirements: Most institutional investors, including VCs and angel groups, require D&O insurance as a condition of funding. It is frequently a closing requirement in Series A and later rounds.
• Board member recruitment: Experienced board members and independent directors will not serve on a board without D&O coverage. Without it, you are limiting your talent pool to people who do not understand the risks.
• Employment claims: Startups hire, fire, and restructure rapidly. Wrongful termination, discrimination, and wage-and-hour claims name officers personally, and these are among the most common D&O claims for private companies.
• Regulatory exposure: From data privacy (GDPR, CCPA) to tax compliance, startups face regulatory scrutiny that can result in claims against directors and officers.
• M&A protection: If your startup is acquired, D&O insurance covers claims arising from the sale process. A "tail" policy is essential to protect directors after a transaction closes.

When Should a Startup Buy D&O Insurance?

The right time is before you need it. Most startups should purchase D&O insurance at or before the first priced equity round (Series Seed or Series A). If you are forming a formal board of directors with outside members, you need D&O coverage. If you are raising institutional money, your investors will require it. Do not wait for a lawsuit to discover you are unprotected.

Nonprofit organizations and their board members face many of the same liability risks as for-profit companies, and in some cases additional ones. D&O insurance is just as critical for 501(c)(3) organizations as it is for startups and corporations.

Special Considerations for Nonprofit Boards

• Volunteer board members: Many nonprofit directors serve as unpaid volunteers. Without D&O coverage, they risk their personal assets for service they provide for free. This makes recruitment and retention of quality board members extremely difficult.
• Fiduciary duty claims: Nonprofit directors owe duties of care, loyalty, and obedience. Allegations of financial mismanagement, conflicts of interest, or failure to fulfill the organization's mission can lead to lawsuits against individual board members.
• Donor and grant compliance: Misuse of restricted funds, failure to comply with grant terms, or misrepresentation in fundraising materials can trigger claims from donors, grantors, or state attorneys general.
• Employment practices: Nonprofits have employees, and employment-related claims (wrongful termination, harassment, discrimination) are among the most frequent D&O claims for nonprofits.
• IRS and regulatory actions: Loss of tax-exempt status, failure to file Form 990, or improper private benefit transactions can expose directors to personal liability.

Nonprofit D&O policies are generally less expensive than for-profit policies because the risk profile is different. However, do not assume your general liability policy covers directors and officers. General liability covers bodily injury and property damage, not management decisions. A separate D&O policy is required.

D&O insurance costs vary widely depending on the type of organization, its size, industry, risk profile, and the coverage limits selected. Here are general ranges:

Buying D&O insurance is not like purchasing a commodity. The process requires careful evaluation and usually the help of a specialized broker. Here is a step-by-step approach:

1. Engage a specialized broker. Work with an insurance broker who specializes in management liability, not a general business insurance agent. D&O policies vary enormously in their terms, exclusions, and sub-limits, and a specialist broker will know which carriers and forms are best for your situation.
2. Complete the application. The insurer will require detailed information about your company: financial statements, board composition, governance practices, industry, prior claims, and capitalization structure. For startups, expect questions about funding history and runway.
3. Evaluate multiple quotes. Do not accept the first quote. Compare policies from at least three carriers. Focus on coverage terms (not just price): look at exclusions, definitions of "wrongful act" and "claim," sub-limits, and the carrier's claims handling reputation.
4. Negotiate key terms. Many policy terms are negotiable. Priority items include: broadening the definition of insured persons, narrowing exclusions (especially the "insured vs. insured" and "prior/pending litigation" exclusions), and adding favorable settlement terms.
5. Review the policy carefully before binding. Have your legal counsel review the final policy wording. Pay special attention to the "claims-made" trigger (D&O policies only cover claims made during the policy period) and any retroactive date restrictions.
6. Plan for renewal and tail coverage. D&O is a claims-made product, so continuous coverage is essential. If your company is acquired, goes public, or dissolves, purchase "tail" (extended reporting period) coverage to protect directors for claims arising from events during the policy period.

Even companies that purchase D&O insurance frequently make mistakes that leave directors and officers exposed. Avoid these common pitfalls:

• Buying on price alone. The cheapest D&O policy is rarely the best one. A low premium often means narrower coverage, more exclusions, and a carrier that will fight claims rather than defend them. One denied claim will cost far more than the premium difference.
• Ignoring policy exclusions. Every D&O policy has exclusions. Failing to review them means you may discover gaps only when you need coverage most. Common problematic exclusions include "insured vs. insured" (which can bar claims between co-directors), prior-acts exclusions, and bodily injury/property damage carve-outs.
• Letting coverage lapse. D&O insurance is "claims-made," meaning it only covers claims reported during the active policy period. A lapse in coverage can create an uninsured gap that retroactively voids protection for prior acts.
• Not purchasing tail coverage during M&A. When a company is acquired, the existing D&O policy typically terminates. Without tail coverage (extended reporting period), directors have no protection for claims related to pre-acquisition events. This is one of the most expensive oversights in D&O insurance.
• Failing to report claims promptly. D&O policies require timely notice of claims and potential claims. Late reporting is one of the most common reasons insurers deny coverage. Establish a process for board members to report any threatened or actual claims immediately.
• Assuming general liability covers management decisions. General liability insurance covers bodily injury and property damage. It does not cover breach of fiduciary duty, employment claims, or regulatory investigations. D&O requires a separate, dedicated policy.
• Underestimating coverage limits. A policy with $1M in limits may sound adequate until you face a multi-million-dollar securities claim or a class action employment lawsuit. Work with your broker to model potential exposure scenarios and set limits accordingly.