Even Home-Based Businesses Need D&O

Even Home-Based Businesses Need D&O

It’s easy to think that businesses run out of a person’s home are too small to require directors and officers (D&O) insurance, but that is a myth. It’s not the size of your company that matters but the fact that employees, vendors, other companies or your investors could sue your leadership for failures in performing their duties. Such lawsuits — even those that turn out to be unfounded — can rack up hefty legal expenses, hurt your reputation and potentially result in settlements or judgments that could bankrupt your business.

D&O liability insurance offers financial protection for those who operate and oversee your company so their personal assets — and the assets of your company — are not drained in the event of a claim.

According to the U.S. Small Business Administration, a “home-based” business is one that operates primarily out of someone’s home, though business activities may take place at other locations. Approximately 15 million small businesses are home-based, the most common classifications of which are information, construction, and professional/scientific/technical services.

While many people think of D&O insurance as something intended for large, publicly traded companies, it’s important to note that being home-based doesn’t exempt you from the responsibilities held by all company leaders, including:

  • Management of corporate operations
  • Use of company funds
  • Appropriate and truthful reporting and payments (e.g., taxes and invoicing)
  • Ethical hiring of competitors’ talent
  • Oversight of data and other security concerns

Operating as a designated legal entity, such as an LLC, does not mean personal assets are protected. When a lawsuit is filed against a company, it’s possible for both the business and its individual leaders to be named. If those individuals don’t have D&O liability insurance, they might have to fund their own legal defense. And if the organization doesn’t have a D&O policy, the owners might have to use crucial business funds to defend the company.

No substitute for D&O Coverage

The liability portion of your homeowners insurance has nothing to do with your company. This policy normally excludes liability claims against a business owned or operated by you or a member of your household. And while you definitely should have a commercial general liability insurance policy, you shouldn’t count on it to cover allegations against your company’s leadership.

Your business’s general liability insurance would kick in if one of your decisions causes bodily injury to another person or physical damage to someone’s property. However, the policy normally excludes liability claims alleging wrongful acts or decisions, such as mismanagement of funds, questionable business practices, conflict of interest, or violations of contracts or agreements.

Additionally, professional liability insurance is not a substitute for D&O coverage. Professional liability insurance is designed to protect the assets of the business from allegations of financial harm caused by the business’s failure to perform to an expected standard of care. For example, an IT consulting company might make a programming error that shuts down a client’s network. That fits under a professional liability policy. Were the same company to be accused of poaching customers from a competitor in violation of a non-compete agreement, a directors and officers complaint might be filed.

Getting the right policy

Your insurance professional might suggest D&O coverage as part of a package that includes other important coverages like professional liability, fiduciary liability and employment practices liability. Each of these has a role to play depending on what your home-based business does.

D&O liability insurance may also be available on a stand-alone basis, which could allow your insurance professional to offer a policy tailored specifically to your business. Partnerships, nonprofits and private-equity backed businesses have distinct needs based on who has a financial stake in the organization. Your insurance professional will work with you to find a D&O policy or executive liability insurance policy that is right for your home-based business.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.

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