The Importance of D&O Insurance

Directors and Officers (D&O) insurance can protect your business from financial loss from third-party claims. Learn how Evertas can help.

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The actions of a company’s executives are especially consequential and carry substantial financial implications. Because of this, executives take on a level of risk that regular employees are not exposed to: the risk of being sued by investors, vendors, customers, or even competitors. Of course, where there’s risk, there’s usually someone willing to provide insurance against it, and that’s the case where Directors and Officers (D&O) policies come in.

What Is D&O Insurance?

Directors and Officers insurance is a type of liability coverage that protects a company in cases where its executives or directors are sued for actions taken in the course of doing their jobs. It is primarily intended to cover the cost of defending or settling lawsuits, usually brought by investors and occasionally other third parties. D&O insurance policies cover both current and past directors and officers of the company, so even if an executive is no longer employed at the organization when the claim is filed, they are covered under the policy.

The retroactive nature of D&O policies made news recently when Sam Bankman-Fried argued that despite his having been replaced as CEO under accusations of fraud months before, FTX’s D&O coverage should pay for his defense in the civil legal actions brought against him by the bankrupt exchange’s creditors. The judge in the case ultimately ruled against the petition.

Types of D&O Coverage

There are three types of D&O insurance, often referred to as Side A, Side B, and Side C. Side A covers individual officers if the company is unable to pay for indemnification. In that case, the officer’s personal assets are at risk, so the liability coverage protects them from financial losses.

Side B insures the company against losses when it grants indemnification to the directors and officers named in the lawsuit. If the corporate assets are at risk, a D&O policy will reimburse the company for the legal costs associated with the claim.

Side C is similar to Side B in that it is the company that is insured and corporate assets that are at risk. However, it covers the corporate entity itself instead of individual officers and directors.

Does Your Business Need D&O Insurance?

Whether or not your business needs D&O liability insurance will depend on several factors, including the size and nature of the company. Firms that have taken on outside investment and thus most likely have a board of directors will need D&O coverage. Indeed, most funds will demand it as a requirement of investment. Smaller, pre-investment companies may also consider purchasing a policy since they are less likely to have the financial and legal resources required to recover from lawsuits filed against them by customers or vendors.

In the US, public companies are required to carry D&O insurance.

This produced an interesting dynamic in the case of, when in 2019, the company’s D&O carrier decided that the increasingly erratic behavior of its CEO — who owned about 30% of the company’s shares and thus would normally be considered safe in his position — made the risk of costly legal action against him unacceptably high. The insurer threatened to cancel Overstock’s D&O policy unless the CEO resigned his position, which he did, in addition to liquidating all of his ownership in the company.

D&O Insurance for Crypto Companies

Companies in the Web3 space have unique needs, which make standard D&O coverage a poor fit. For example, most Web3 firms have taken on outside investment but are rarely publicly traded. Thus, given the very low likelihood that a venture or private equity firm will sue its own portfolio company, the threat of investor lawsuits is minuscule and doesn’t need to be included in a policy. Evertas is developing D&O solutions adapted specifically to Web3.

To learn more about our crypto-specialized insurance products are available to protect your innovation, reach out to our experts .