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Presumptive insurance

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Web3 directors are you indemnified?

A Directors and Officers Liability (D&O) insurance policy provides coverage for defence costs and damages arising from actions brought against a company’s board of directors and/or officers as well as the company itself. A D&O policy comprises three parts:

  • Side A covers the directors and offices personally (ie, protects their personal assets) if the company can’t or won’t indemnify them in the event a claim is brought against them.
  • Side B covers the legal costs incurred by the company when defending directors and officers.
  • Side C covers security-related claims against the business, not against the directors and officers.

In this article, we’ll focus on protecting directors and officers if they are sued for actual or alleged wrongdoing when managing a Web3 company, and we’ll explore the concept of presumptive indemnification and its impact on a D&O insurance policy.

New company– standard articles?  

When a legal claim is brought against a director/officer by internal parties (other D&Os or employees) or external parties (or by both), a claim can often result in personal liability which subjects personal assets to potentially significant loss.

Web3 firms are especially vulnerable to legal action because of the evolving regulatory landscape, the fast burn rate of capital and the volatility in business model. There is little (but rapidly growing) legal or regulatory precedent in claims and investigations in the running of Web3 firms.

Because the industry is developing so fast and, in some cases, still finding its feet, some of the most common legal claims are for deceptive or false advertising, misrepresentation, breach of contract, and non-compliance. Claims are often made simply because a firm has not reacted fast enough to changing conditions.

Given the volatility of the marketplace, the financial performance of Web3 firms can fluctuate widely, and the presumption of wrongdoing can be more prevalent. Therefore, the directors and officers should ensure their articles of association or equivalent provide specific indemnification provisions.

In some cases, directors and officers can find themselves with little protection from their company, to the extent that they will only be indemnified by the company if after final adjudication they are found innocent of the accusation. This leaves the directors and officers in an uncertain position, as they may have to defend the claim themselves.

What is presumptive indemnification in D&O insurance?

This clause assumes that a company will indemnify its directors and officers to the “fullest extent permitted by law”. In other words, it does not matter what the company actually states in its articles of association indemnification provisions, because insurers expect the company to go beyond that to the maximum extent permissible.

With this clause in place, when a claim is made, the D&O insurance only covers claims relating to matters where the director was indemnified by the company or where the company was able to indemnify the director or officer, leaving the directors exposed to significant personal liability if the articles of the company do not require the company to defend the director.

Web3 directors and officers need to be aware of any limitations in the indemnification provided by their company. Any ambiguity or omissions could lead to uninsured liability in the event of a claim, and without maximum protection permissible under law, Web3 directors and officers could face a large, uninsured loss because of presumptive indemnification clauses.

Some D&O insurance policies will include a presumptive indemnification clause. For example:

“The Named Insured  and any other Company agree to indemnify the Insured Persons , including the advancement of Claim Expenses incurred by the Insured Persons to the fullest extent permitted by law or the functional or foreign equivalent.”

Side A D&O will protect directors and officers when they are not indemnified by their company. Scenarios include bankruptcy, regulatory and criminal proceedings, and acts of ‘bad faith; however, in circumstances that the company can indemnify a director and chose not to, then the director may find there is limited access to coverage.

As Web3 grows in popularity and becomes more mainstream, it is crucial to maintain and monitor sufficient levels of D&O coverage. We strongly encourage any firm, whether operating in Web3 or not, to be aware of indemnification clauses and buy right level of D&O insurance.´

For further advice and information on Elmore’s D&O services, please contact the Elmore Fintech and Web3 Team: ElmoreFinTechTeam@elmorebrokers.com

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