Whenever there are outside shareholders, and when there is a product in release, there is a chance, no matter how slight, of a lawsuit against members of the board as well as against the corporation itself. Even if such a suit is completely without merit, the cost of defense and the risk of a negative outcome both hang over the company and the director. Directors and Officers insurance is meant to reduce that risk and provide for the legal defense of any such suit at the expense of the insurance company. In that regard, even the lowest amount of D&O insurance available, $1 million, provides for legal defense costs to be covered. The usual cost for such insurance is $4 to $6 thousand a year, with an extra $2 thousand for an additional million of coverage.
More important than the cost is the provision of investment documents from sophisticated investors requiring D&O insurance for the company at the time of funding.
Over the many years of board service, I have been sued as a director several times, in no case covered under the umbrella of a D&O policy. Although I won each of these rather spurious suits, the cost of defense in some of the cases was not reimbursed, and the time spent in helping the attorney prepare for the defense and in one case through to a several day adjudication event, was not small. As a result, I now insist upon D&O insurance for every board upon which I sit. The backgrounds of these suits make for good stories, which you might ply from me at a later telling.