The acquisition of a D&O policy is often triggered by one of the following events:
- new board member requires that company has D&O
- new investor (such as a VC) requires D&O insurance as part of term sheet
Ultimately the D&O policy is the mechanism by which you will be shielding the personal assets of the officers and directors - as well as the balance sheet of the company (most company have an indemnification agreement in their bi-laws that basically translates into this: the company is responsible to cover claims against the D&O's out of its coffers...the problem comes when there is no money available or the indemnification is prohibited by law). Most people who will agree to be on your board will not be willing to risk their personal assets based on the performance of your company. You might not either.
So back to the original question - When? As soon as company is operational with a management team and board AND as soon as you can afford to transfer the risk to an insurer (minimum premium can be about $2,500/year)
One other important point to consider - as a private company your biggest threat of action against the management team will be from employees. D&O policies can cover employment practices claims (wrongful termination, failure to hire, discrimination...) once you have a workforce it will increase your risk and be another factor to consider when thinking about D&O insurance.
In a previous post I discussed how we have found that many Venture Capital firms pay more for insurance than they should - often for policies that don't even properly address the risks of their company. The National Venture Capital Association just circulated an illustration with 9 specific examples of their member firms who, through the VentureInsure program, have saved as much as 57% on their insurance costs (where's that Geico lizard now??), while getting better coverage.
Check this out - this represents only the basic office coverage such as General Liability, Property, Umbrella. Venture Capital insurance policies such as D&O and Professional Liability are not included in this illustration - however it is worth noting that historically the savings on that line of coverage, when moved to VentureInsure, has averaged more than 20%....
I didn’t see the A-Team movie this Summer, but have to admit as a child of the 80’s I was a big fan of the TV show. I remember vividly watching the pilot as a 13 year old after the Redskins beat the Dolphins in Super Bowl XVII. I know BA hates flying, I know the crack commando team went to prison in 1972 for a crime they didn’t commit, and I know that Hannibal (George Peppard, the only Hannibal) is a cigar smoking, master of disguise.
The real A Team
So what does this all have to do with insurance? Probably not alot…but here’s a shot:
We work with many VC’s as part of our role in managing the insurance program for members of the NVCA. And we have found that, like most innovators, Venture Capitalists are so focused on working IN their business that they sometimes don’t spend enough time working ON their business. This is evidenced with our frequent discovery of poorly structured insurance placements for VC’s, on even the simplest of insurance policies. (Clarification – it’s not a policy holder’s fault if their insurance is not up to par….that is their broker’s job. The policyholder is only responsible for choosing the right broker) Take a General Liability (GL) policy for example: every company has one of these babies. It covers your business for claims that you, your employees or products/services caused someone else bodily injury or property damage. But it also covers a wide variety of personal injury issues that could come into play for a VC. Since most insurers (I’m not aware of any) don’t have a specific classification in their policies for a VC firm, they will categorize them as investment advisors or some other similar financial organization. And in doing so they will also receive a myriad of exclusions that are typical for financial organizations….inluding ones that will severly limit their ability to cover personal injury claims. Insurers also worry about picking up vicarious risks stemming from activities of portfolio companies….hence, more exclusions.
Another problem in this scenario is the pricing. Since most insurers shy away from insuring smaller financial organizations (due to perceived high risk trading/transactional risk that could spill over onto a GL policy) they don’t even offer a small business policy. So most VC’s are placed on a policy that is designed, and priced, for larger firms.
Recognizing these issues and shortcomings our crack team at TechAssure set out with NVCA to build a solution for Venture Capital companies. The result, which is exclusively available to it’s members, corrects the coverage problems, removing almost every exclusion, and has reduced the average venture capital firm’s costs by more than 20%. The policy recognizes VC’s as a “small business” as it pertains to risks covered by basic insurance – the way it should be.
Ready for the tie-in?? As Hannibal Smith said best- I love it when a plan comes together.
The right insurance program can shield a VC from these, and other, unfortunate scenarios