Do Small Companies Need Directors & Officers Insurance?

Some people believe that directors & officers insurance, often called D&O insurance, is only for large companies that are publicly traded on a big exchange. That may be because this type of coverage isn't understood by many. D&O insurance is a kind of business insurance that protects individual executives, directors or managers from liability claims. Typically, these claims are expected to only come from a public company's shareholders. However, there are plenty of other external sources of liability claims to consider.

External Lawsuits Don't Just Come From Shareholders

A company's officers and directors could be vulnerable to personal lawsuits from plenty of external sources that don't include shareholders. Any company that maintains relationships with outside customers, vendors or sources of financing may find that its executives may be at risk of being sued. This leaves the people in the boardroom exposed to the threat of having to pay for defense and, if they are found liable, settlements or judgments.

Some executives may believe that they are protected by the general liability and umbrella insurance policies that their company already holds. However, this kind of coverage may only protect the company and not a specific manager's actions. The first step could be determining exactly what is already covered and what is not covered.

Directors & Officers Insurance for Small Companies

Furthermore, many insurance companies offer management liability insurance that is specifically designed for small businesses. Premiums may start at about $1,500 per year. Since this kind of coverage can protect against six- or seven-figure claims, it might be worth considering as an investment in peace of mind.