When a board of directors is assembled by a company, the first requirement often made by the board is for the company to carry directors and officers insurance. Each board member may be willing to stake their personal reputation on the company, but they are not willing to risk their personal assets as well. Since board members can be held personally responsible for the actions of the company in a lawsuit, the board members will frequently require protection in the form of d & o insurance.
Investors Want to Minimize the Risks Involved Relating to Investment
Board members are not the only ones who want to minimize the risk of being financially impacted by a lawsuit filed by a client, employee, or stockholder. Investors may also be held financially responsible in a lawsuit, and they may ultimately base their willingness to invest in a company on whether or not the company carries d & o insurance. If the company is without directors and officers insurance, the prospective investor may make it a condition of the investment that the company attain proper insurance coverage in the form of d & o insurance. It only makes sense that an investor or venture capitalist will seek to minimize their risk, as board members and investors can be sued as part of allegations against the company, which include:
- Misappropriation of funds
- Financial mismanagement