How to Choose Limits and Retentions for Directors and Officers (D&O) Liability Insurance When You’re an SME

Directors and Officers (D&O) liability insurance protects company leaders and the company itself from claims alleging wrongful acts, mismanagement, or breaches of fiduciary duty. For private companies and SMEs in the USA — from San Francisco startups to Boston life‑science firms and Austin tech shops — selecting the right limit and retention (self‑insured retention/deductible) is a high‑leverage decision: too little coverage leaves executives exposed, too much raises unnecessary premium costs.

This guide explains how to choose limits and retentions tailored to U.S. SMEs, provides realistic pricing examples from leading insurers, and gives a practical checklist to use when requesting quotes.

Quick definitions

• Limit: The maximum amount the insurer will pay under a policy (e.g., $1M, $5M, $10M).
• Retention / SIR (Self‑Insured Retention): The amount the insured must pay on a claim before insurance responds (e.g., $10k, $50k).
• Side A / B / C coverage: Side A protects individual directors; Side B reimburses the company when it pays defense/indemnity costs; Side C covers the entity for securities/derivative claims.

Why limits and retentions matter for SMEs in the USA

• Claims sizes exceed expectations: Even a single employment practice or shareholder litigation matter can generate defense costs of $100k–$500k in the U.S., often before settlements. That makes adequate limits and low enough retentions vital.
• State and venue differences: California, New York and Delaware litigation environments typically result in higher claim frequency and severities. Location matters when benchmarking limits.
• Balance budget and protection: SMEs must balance premium affordability with meaningful risk transfer. Smart retention choices reduce premiums while preserving capacity when it’s needed.

How to choose the right D&O limit

Consider these core factors when selecting a limit:

• Revenue and balance sheet: Larger revenues and assets attract larger claims. As a rule of thumb:
  • Early‑stage SMEs (<$10M revenue): start at $1M–$3M limits.
  • Mid‑market SMEs ($10M–$100M): consider $3M–$10M.
  • Larger private companies or VC‑backed firms ($100M+): $10M+.
• Industry risk: Financial services, healthcare, biotech, and crypto/fintech face higher securities/regulatory risk — push limits higher.
• Ownership and capital structure: VC/PE investors, multiple investor classes, or public‑company aspirations increase exposure; investors often require $5M–$10M.
• Board composition: High‑profile directors (former executives, board seats at public firms) increase claims attractiveness — you may need higher limits or Side A‑only excess towers.
• Contractual/transactional exposures: Lenders, acquirers, and some contracts require specified limits.

Practical guidance:

• Start with $1M if you’re small, low‑risk, and privately held with limited investor pressure.
• Move to $5M if you have institutional investors, >$20M revenue, or operate in a regulated sector.
• Consider $10M+ if you are growing fast, have public company aspirations, or have repeat investor/litigation risk.

How to select an appropriate retention (SIR)

Retention selection is both financial and practical. Consider:

• What you can pay today: Retention should be the maximum amount the company can pay without jeopardizing operations — commonly equal to 1–3 months of cash burn or available liquid assets.
• Defense‑cost advancement: Does the policy advance defense costs (and are those paid inside the limit)? If defense costs consume the aggregate limit, choose lower retention and higher limit.
• Claims frequency vs severity: For frequent low‑severity exposures (e.g., EPL claims), lower retentions reduce out‑of‑pocket spending. For rare, catastrophic exposures, higher retention saves premium.
• Common SIR bands for U.S. SMEs:
  • Micro SMEs / startups: $0–$25,000
  • Established SMEs: $25,000–$100,000
  • Larger private companies: $100,000–$250,000+

Retention vs premium trade‑off: Raising SIR from $10k to $50k often reduces premium materially (20–40% or more), but exact savings vary by insurer and claim profile.

Real‑world pricing examples (U.S. market — indicative ranges)

Below are realistic market examples and sample insurers active in the SME space. These are representative ranges; obtain broker quotes for firm pricing.

Notes:

• Hiscox and other specialty carriers offer competitive entry‑level coverage for low‑risk small businesses and online quoting for quick pricing. See Hiscox small business D&O offerings for examples: https://www.hiscox.com/small-business-insurance/directors-officers-liability-insurance
• Market conditions, attorney fees in venues such as CA/NY/DE, and prior claims history heavily influence pricing. For market trend context, consult market updates by Marsh and Aon:
  • Marsh D&O market insights: https://www.marsh.com
  • Aon D&O market commentary: https://www.aon.com

Practical step-by-step selection process

1. Inventory exposures
   • Management composition, investor demands, customer contracts, regulatory touchpoints, planned transactions (M&A or IPO).
2. Set a floor based on investor/contract requirements
   • Many VCs require $3M–$10M. Lenders/strategic partners may specify amounts.
3. Assess affordability
   • Calculate available liquid assets and 3 months’ operating cash as a benchmark for max acceptable SIR.
4. Decide limit bands
   • Use revenue, industry and future plans to select low/medium/high bands (get indicative quotes for each).
5. Ask about defense cost treatment
   • Prioritize policies that advance defense costs (Side A advancement), and check whether defense is inside or outside the aggregate.
6. Compare multiple carriers and delivery formats
   • Get quotes on packaged policies (often cheaper) vs standalone D&O. See differences in detail in our coverage comparison resources.
7. Negotiate endorsements
   • Seek prior‑acts coverage, entity coverage (Side C) if needed, and favorable settlement consent clauses.

Helpful negotiation and program design content:

• Negotiation Tips for SMEs Buying Directors and Officers (D&O) Liability Insurance: Get Better Terms Without Breaking the Bank
• Retention Strategies and Captive Options for SME Directors and Officers (D&O) Liability Insurance Programs
• Affordable Directors and Officers (D&O) Liability Insurance Solutions for Private Companies and SMEs

Negotiation tips that affect limits & retention

• Present loss‑control evidence (employment practices, compliance programs) to underwriters to lower premiums or retention.
• Consider retention layering (smaller primary SIR + excess tower) if cashflow is constrained.
• Ask for Side A difference‑in‑conditions or Side A limits if the company cannot indemnify directors in bankruptcy.
• Bundle with management liability package (EPL, fiduciary) when economical — but confirm sublimits that may reduce D&O effectiveness.

Quick checklist before you buy

• Board and investor requirements documented
• 3 quote bands: conservative (higher limit, lower SIR), balanced, cost‑saver (higher SIR)
• Clear decision on whether defense costs are inside or outside limits
• Prior‑acts coverage timing clarified
• Confirm whether state‑specific exposures (CA, NY, DE) require higher limits
• Obtain written explanations of exclusions and consent clauses

Sources and further reading

• Hiscox — Small business D&O information and product overview: https://www.hiscox.com/small-business-insurance/directors-officers-liability-insurance
• Marsh — Market insights and D&O commentary: https://www.marsh.com
• Aon — D&O market updates and analysis: https://www.aon.com

For tailored pricing and structure, work with a broker experienced in U.S. SME D&O placements — they’ll assemble insurer comparisons, negotiate retentions, and confirm whether you need Side A‑only towers or entity coverage adjustments.