The Insurance Policy Every Entrepreneur Should Have

D&O insurance protects directors, officers and even the firm from costs arising out of lawsuits

- Aprajita Sharma

If you are a business owner or a startup founder, you need to protect your company from unforeseen legal disputes. A company's top executives and key directors could be held accountable in a personal capacity when something goes wrong, and fighting such lawsuits may cost fortunes. Entrepreneurs, especially owners of small businesses and founders of startups, will find it worthwhile buying a directors and officers (D&O) liability insurance policy.

A D&O policy protects a firm and its key managerial staff from unforeseen legal disputes. The insurance company will pay for legal costs or the compensation or settlement amount, including penalties and fines, but it's important to understand how D&O insurance works and the features that you must consider that are specific to your company or industry, as well as the exclusions.

How D&O policy works

All D&O policies have limits up to which specific costs will be covered. This is called limit of indemnity or limit of liability. "It should ideally be 10-25% of the total net worth of the company, as a thumb rule," said Mudassir Khalil, head of reinsurance, surety, liability at Digit Insurance. A company can opt for higher coverage.

"The ideal limit of liability is subjective. An adviser may recommend a sum assured based on past claims linked to the industry and size of the company," said Abhishek Bondia, principal officer and managing director at Secure Now Insurance Broker. "Insurers are comfortable issuing a wide range of overall sum assured limits, but are more careful about defining the deductibles and sub-limits in the policy," he added.

Deductible, called retention in D&O liability insurance, is the amount a company bears before the policy coverage kicks in. For example, if your company has a ₹15 crore D&O insurance with ₹5 lakh deductible, the company or the directors and officers involved will bear up to ₹5 lakh of the legal costs before the insurer pays for it.