Venture Capitalists Teach Angels D&O Insurance

Directors and Officers liability insurance, or “D&O,” provides financial protection for the directors and officers of a company should they be sued or suffer a loss in conjunction …

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Directors and Officers liability insurance, or “D&O,” provides financial protection for the directors and officers of a company should they be sued or suffer a loss in conjunction with their performance of company duties.  In recent years, venture capitalists have begun availing themselves of this insurance by becoming officers in the company, such as CFOs. But many angels still don’t have D&O insurance. As more and more angel investors pour personal funds into startups, though, this insurance becomes vitally important as a way to protect personal assets.

Most large public companies provide D&O insurance to their directors and officers. It also often is included in the entrepreneur-investor term sheet offer, a kind of pre-nuptial agreement for prospective business partners. A typical term sheet offer includes the valuation and capitalization provisions, the financial terms, and the control terms. It should include D&O insurance as well.

As of year-end 2012, the largest direct writers of D&O coverage in the United States were American International Group, Inc., XL Group Ltd, The Chubb Corporation, HCC Insurance Holdings, and Travelers Companies, Inc.

Most claims for reimbursement under D&O insurance historically have been related to securities litigation and regulatory actions and settlements. More recently, there also have been many claims related to mergers and acquisitions. Many large D&O claims also arise from corporate malfeasance or regulatory investigations, the types of stories that receive wide coverage in the business and mainstream media.

A D&O policy also should protect you from claims against the company by stockholders, employees, and customers. Nearly half of all D&O claims come from employees; a study by Watson Wyatt Worldwide in 1997 found that one-third of all companies have had at least one claim made against their directors or officers, though most are at large companies, with more than $100 million in assets.

In case of a lawsuit, D&O insurance reimburses the company’s directors and officers for any losses they incur as a result of legal action brought against them for alleged wrongful acts related to their position. A good policy provides broad indemnification coverage, including defense costs incurred from civil/criminal actions, regulatory investigations, court appearances, and trials.  Before investing, review the indemnification policy, and review it thoroughly.

So, angel investor, take a lesson from the VCs. Become an officer in the company in which you are investing, and make sure you are covered by its D&O insurance. If it’s not on your term sheet, demand that it be included.

For more updates on global angel networks and trends, the latest information on alternative investment activities and events, or if you have thoughts to share about this article, leave your comments here or reach out to me directly at David@LDJCapital.com.

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