Directors of startup companies, by their very nature, are risk takers. That’s how they succeed, how they have the courage to try new things, and why they take leaps into the unknown.
And because of that nature, they need insurance.
Insurance Business spoke with Kevin LaCroix, EVP at RT ProExec, a division of wholesale brokers
RT Specialty, about the business of placing D&O insurance solutions for “development stage companies.”
“They face an enhanced risk profile,” LaCroix said, “compared to a private company that has been in business for many years. As a result, that has [enhanced] liability and insurance consequences.”
In terms of their risk profile, development stage companies have relatively short business track records, they have unproven commercial acceptance and business practices, and they are often still engaging in rounds of financing. All of this means they’re a risk for insurers.
“The liability consequences are that they probably have investors … that have expectations for the company,” LaCroix explained. “But it’s not just investors – the types of claims these companies can face include not only investor-owner claims, but also supplier, vendor, customer [claims]. Even employees can become claimants.
“And it’s worth emphasizing, if it isn’t clear already, that a developmental stage company does face a heightened risk of these types of claims.”
So, obviously, with that heightened risk, not all carriers want to get involved with insuring startups, LaCroix said. The London market writes a lot of the segment, he said, as well as some major players in the US.
In terms of coverage uptake, for customers in this space that have faced some liability fallout in the past, buying this insurance is a no-brainer, LaCroix said. But for others who might be newer entrepreneurs, sometimes they’re averse to paying for the insurance. After all, they’re risk-takers.
“Senior management of these [startup] companies, they’re risk-takers,” he said. “They wouldn’t be doing it if they weren’t. And cash is usually in short supply, so they question the need to take whatever portion of the scarce cash reserves that is available and devote it to insurance.”
The “heightened” risks are definitely there, though – which creates opportunities for brokers to be encouraging development stage directors to be taking up the insurance designed for their needs.
“They do have a wide variety of insurance exposures. From an insurance standpoint, I would think that in the early stages of a company, it would be prudent for the managers of the company to make sure they have D&O insurance in place. They’re undertaking actions that could give rise to personal liability,” LaCroix said.
“And while the company itself has indemnification obligations to them, if things go bad they could go bad in a hurry – and often when they do, the company itself is insolvent. So then the implied indemnification promise may have no value. The only protection they may have in those circumstances is the D&O insurance.”
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