Company directors and officers make crucial business decisions and, as such, face the possibility of detrimental retribution and liabilities, including allegations, lawsuits, trials, and judgments. These circumstances can impose financial and legal strain not only on the business but also on the organization’s decision-makers, who are often the ones held responsible.
One essential safeguard against financial and legal risk for organizations is adopting a Directors and Officers insurance policy, also known as a D&O policy. Baldwin Risk Partners (BRP) provides support and protection to help protect against potential lawsuits and the plethora of risks that businesses and organizations may encounter.
This article discusses this type of coverage and factors to consider when selecting a policy, like directors and officers insurance cost, as well as our holistic approach this coverage.
Understanding Directors and Officers Insurance
Corporate leaders and decision-makers have a duty to operate in their company’s best interest. However, acting in its best interest can result in legal and financial liabilities. Many decision-makers face consequences and retribution because of the decisions they make on the company’s behalf and are often not protected from the legal and financial losses incurred during lawsuits from employees or shareholders.
In simpler terms, D&O coverage pays directors/officers or organizations for losses incurred due to legal action taken against them for alleged wrongful actions, employment practices, and regulatory investigations. These elements of D&O fall into categories known as sides or clauses, which help identify the various aspects of D&O coverages for the insured.
Insuring Clause A (Non-indemnified)
This clause identifies coverage for individual directors and officers when an organization cannot or will not indemnify (reimburse) them due to legal or financial inhibitions. It provides security and protection for personal assets.
Insuring Clause B (Indemnified)
Clause B pertains to claims where the organization can and will indemnify individual Directors, Officers, and Employees of the company. It protects the company’s internal balance sheet, as reimbursement is payable to the company.
Insuring Clause C
This policy directly governs security claims against the company, not individuals within it, while protecting its balance sheet.
Claims Covered by D&O Insurance
D&O insurance covers a broad spectrum of claims. Some of these include shareholder lawsuits over the company’s performance, shareholder suits over the company’s stock performance, creditor/investor suits regarding mismanagement or the dereliction of fiduciary duties, misrepresentation in a prospectus, decisions made beyond the authority granted to a company officer(s), failing to comply with regulations or laws, pollution and other regulatory claims, employment practices and HR issues, and cyber liability.
Importance of D&O in Leadership
The benefits of a D&O policy extend beyond a financial safety net, providing leadership with peace of mind when making necessary decisions to manage and grow a business. As an organization, carrying D&O liability insurance motivates directors and officers, who may otherwise fear legal and financial retribution, to make steadfast, beneficial, and crucial decisions that impact the organization’s growth. In conjunction, directors and officers may be more likely to remain in their positions, knowing that they are protected and supported. D&O insurance is not just a policy; it’s a cornerstone of effective corporate leadership. Similarly, many investment firms specifically require evidence of D&O insurance before investing.
Factors to Consider When Choosing D&O Insurance Coverage
Several types of D&O policies are defined by what liabilities, legal costs, and other exposures are covered. It is not one size fits all, and those looking to acquire D&O coverage should consider the organization’s needs, operations, and structure. Selecting the correct coverage can seem daunting, and resources are available to help. However, there are a few key factors to consider when choosing the coverage that best suits your needs.
Coverage Limits
Selecting the appropriate coverage limits is a critical decision when purchasing D&O insurance. Coverage limits determine the maximum amount the policy will pay out in the event of a claim. The organization’s size is a key factor to consider, as larger organizations will require higher coverage limits due to their increased exposure to potential lawsuits. However, this also indicates a higher need for D&O coverage due to that exact reason.
Similarly, evaluating your organization’s industry and risk profile will also help you determine the correct limits of your coverage. Industries with higher inherent risks, such as finance or healthcare, may require more extensive coverage.
Exclusions
D&O insurance policies typically contain exclusions that specify what is not covered. Understanding these exclusions is vital to ensure that your policy aligns with your organization’s needs. Ensure that the policy’s definitions align with your organization’s understanding for assurance of the security and protection your policy provides. It is important to note that D&O insurance does not cover intentional illegal acts. Two key exclusions are:
Fraud: An insurance carrier can deny a claim alleging deliberate or criminal fraud by an individual. However, as this is a common accusation, most carriers limit the ability to apply this exclusion to the point at which the Finding of Fraud has arrived at its final adjudication (there are no other Courts to appeal to).
Insured vs. Entity Exclusion: This exclusion prevents the company from bringing a suit against an individual Director or Officer (colluding).
Other exclusions may include profiting personally from the business, accounting of profits, pending and/or prior litigation, prior (late) claim notice, insured versus insured claims, ERISA, bodily injury/property damage, pollution exclusion, and other illegal compensation exclusions.
Policy Features
Look for D&O insurance policies with tailored features that match your organization’s industry and risk profile. These tailored policies can provide comprehensive protection. Additionally, consider additional coverage options based on your organization’s unique risks, such as employment practices liability coverage or entity coverage.
Claims Handling and Service
Evaluating an insurer’s claims handling process is crucial. A responsive and efficient claims process can make a significant difference in the outcome of a claim, such as how effective, costly, or drawn out a claim might be. Research the insurer’s reputation for providing excellent service and timely claims resolution. Insurers with a reputation for excellence in claims handling are more likely to evaluate claims fairly and promptly, ensuring you receive the compensation you are entitled to under your policy. This fairness is vital in maintaining trust between policyholders and insurers.
Assessing the Financial Stability of Insurers
A risk for organizations purchasing D&O insurance is the reliability of the insurer. In times of crisis or large claims, a financially stable insurer ensures that they can meet their obligations and provide long-term support. Independent agencies that assess and evaluate insurance companies are an available resource for potential and recurring clients. These agencies score companies within various categories, including their financial stability, which provides insight and furthers the ability of clients to ensure their decisions are well-informed. Because businesses will promote and push positive reviews to the forefront, utilizing these agencies alleviates the biases of insurance providers.
Directors and Officers Insurance Cost
Several factors influence the directors and officers insurance cost, including the size and nature of the organization, past claims history, and risk profile. Compare different pricing structures and policy options to balance cost considerations with the need for comprehensive coverage. Forbes calculated the median directors and officers insurance cost to be $1,240 annually.
The Role of a Broker in Selecting D&O Insurance
Working with an experienced insurance broker can simplify the process of selecting D&O insurance, and potentially affect your directors and officers insurance cost. Brokers can assess your organization’s needs, identify suitable policies, and negotiate coverage terms and pricing on your behalf. They act as your trusted advisors in navigating the complexities of insurance. An insurance broker can offer insights that help evaluate your policy in relation to peers and market reports to ensure the best possible coverage. The valuable advisory that insurance brokers offer creates a specialized and personalized experience when dealing with policies, claims, and negotiations. D&O insurance brokers understand the complexities and intricacies of D&O coverage, especially in relation to the requirements and knowledge of managing a D&O policy, such as regulatory inquiries, oral/informal demands, and legal documents of lawsuits. Because of these factors, finding an experienced broker is crucial because you will need more than just an auto-generated quote online.
Secure Your Leadership with D&O Insurance
D&O insurance coverage is critical for organizations and their leadership, protecting those who make the big decisions. D&O coverage provides stability, security, and peace of mind for those in leadership. It is a recommendable solution and proactive assurance for company directors, officers, and the entirety of the organization. By considering factors such as coverage limits, exclusions, policy features, claims handling, financial stability, and the assistance of an experienced broker, you can ensure your organization’s protection in the face of legal and financial challenges.
Expert guidance is invaluable in this process, and Baldwin Risk Partners is ready to provide the assistance you need to make an informed choice. Contact us to learn more about how we can tailor a D&O insurance solution to meet your unique requirements and support your organization’s continued success.
