The Best Kept Secrets Behind A Perfect D&O Insurance Plan

TLTR: This article discusses everything there is to know about D&O insurance. We will discuss what is D&O insurance, it’s coverages, and a few frequently asked questions about D&O insurance.

Every company, small or big, needs a good D&O insurance plan. D&O insurance stands for directors and officers insurance. It protects the upper-management and decision makers from financial risks, and hence, it protects the company overall.

But, What Exactly Does D&O Insurance Do?

It Provides Legal Cost Coverage

Directors and officers are exposed to a large amount of litigation risks. As a result of their positions in the company, they are accountable for critical decisions that affect the financial and operational status of the company. These critical decisions can lead to lawsuits. These lawsuits can be larger class-action claims made by high stake shareholders or smaller claims stemming from dissatisfied employees.

The most common allegations made against directors and officers include:

• Misused company funds
• Committed errors and omissions
• Misrepresented company assets

Smaller private companies are also closely regulated by the government. If during a government audit, your company is reported to have failed to comply with any workplace laws, be it a minute detail, you will face hefty fined. Even without the fines, triggering formal legal action in these situations is a very long and expensive process.

With the correct D&O insurance coverage, these issues can be resolved quickly and routinely. D&O insurance covers a lot of the legal costs as well as some of the back-office work, leaving your staff free to continue their regular duties. Your insurance provider will often help you deal with the lawsuit in its entirety, by hiring the best defense team, as well as covering the expenses.

It Attracts Potential Investors

If you are planning to grow your company or organization, external investment is an absolute must. Money doesn’t grow on trees and neither do investors. Any large-scale investor will want to be able to oversee their investment and most will join the board of directors. Not having your insurance in order is a big red flag and D&O insurance specifically can be a requirement to acquire the investment you need to expand.

In fact, according to Embroker, most startup funding contracts from investors will clearly state that a D&O policy needs to be purchased within 90 days of closing the financing.

It Provides Protection From Bankruptcy

If your company files for bankruptcy, having a strong D&O insurance policy in place can protect you in more ways than one.

While bankruptcy in itself can provide you company with a certain degree of protection and personal relief from litigation, the directors and officers will still be at risk. If a situation rises where external parties blame the organization’s leadership and their decisions for the bankruptcy, the responsibility of repaying the company’s debts might fall on those individuals personally.

If directors and officers of a bankrupt organization are sued, collectively or as individuals, things can get very dangerous. The company is no longer around to shield them due to the bankruptcy and because of this, any fines and fees would have to come straight out of their own pockets. The correct D&O insurance policy is the only thing that could protect them from this exact situation.

The Types of Coverage For D&O Insurance:

Side A coverage:

This covers directors and officers for claims where the company is financially unable to pay. This is the exact coverage a company would need to protect their directors and officers in the event of bankruptcy. With Side A coverage, the individual officer is insured and their personal assets are at risk. This coverage is most important to potential investors and also for hiring talent.

Side B coverage:

This covers any losses taken by directors and officers when the company in the event of a lawsuit. In this case, the company is completely reimbursed for legal costs from claims against directors and investors. Under Side B coverage, the company is insured and the company’s corporate assets are at risk.

Side C coverage also known as “entity coverage”:

This covers the corporate entity itself. So, it would essentially provide protection in events of claims made directly against the company as a whole entity. Under Side C coverage, the company is insured and its corporate assets are at risk.

What Are Some Risk Scenarios and Exclusions of D&O Insurance?

It’s important to understand risk scenarios and exclusions in insurance, as they are the simplest way to understand precisely what protections you are paying for. With D&O insurance, terms and policies can get long-winded and confusing. We’ve broken it down into two comprehensive lists.

According to Allianz, the most common D&O risk scenarios are:

• HR issues
• Shareholder actions
• Reporting errors
• Inaccurate or inadequate disclosure
• Misrepresentation
• Failure to comply with government regulations and laws
• Corporate manslaughter
• Insolvencies
• Creditor claims
• Mergers and Acquisitions
• Competitor claims
• Divestitures
• Claims made by the company within itself

The most common exclusions include:

• Fraud
• Intentional non-compliant acts
• Property damage and bodily harm, with exception to corporate manslaughter
• Legal action already taken prior to the policy’s start date
• Illegal personal profit
• Claims made under a previous policy
• Claims covered by other insurance
• Fines and penalties

How much does D&O insurance cost?

No two companies are the exact same. For this reason, the exact cost of D&O insurance can also vary depending on various factors including:

• Company size
• Industry
• Risk appetite
• Financial position
• Revenue
• Claims history

If you assume that all other factors are equal, businesses that can show a longer operating history will likely pay less than newer organizations. Also, companies that can show stronger financial positions are considered lower bankruptcy risk, and are subsequently charged less for D&O insurance.

That being said, Insureon states that the average annual cost of $1,000,000 worth of coverage is usually in the range of $5,000 and $10,000. In a study consisting of Insureon customers, the median cost of D&O insurance is $103 per month, or $1,240 annually.

However, this amount would vary largely depending on the size of the company and the scale of operations. Insureon also states that small businesses pay less than $1,500 per year for D&O insurance.

The median amount is a good marker for how much you would pay because of the inclusion of extremely high and low outliers. There are multi-billion dollar companies as well as companies that consist of four bodies and operate at a loss. The only way to get an accurate quote for D&O insurance is to speak with an agent.

What is the D&O insurance process?

The D&O Insurance process is a 7-step process that could potentially go something like this:

• A manager fails to perform a certain aspect of their role in any way.
• Internal employees or external clients make the decision to sue the manager.
• Either the legal or risk management department provide the claim description to the D&O insurer, by either contacting their broker or the insurance company.
• The legal or risk management department contacts the manager to meet in person, or in this climate, on a one-on-one encrypted video conference call.
• The allotted department informs the manager of the claim.
• If the specific claim comes within the coverage of the chosen policy, the insurer will pay for the defense costs.
• The insurer will also pay for the losses if the defending party loses.

Is D&O Insurance Really Worth It?

According to Chubb, more than 1 in 4 private companies report experiencing a D&O loss in the last three years. The average reported loss was $387,000 and the highest reported loss was $17 million.

Despite how common and dangerous D&O losses are, both to the companies and individuals who endure it, many companies still have not purchased D&O insurance to help manage their risks. Non-buyers of D&O insurance don’t mistake this coverage as unnecessary. This is often the case in family-run companies that believe their blood ties prevent such conflicts, or small businesses that cannot imagine a lawsuit against their humble operations.

On TV and in movies, it’s always the jealous or vengeful shareholders of a large company that starts lawsuits. The highly publicized lawsuits on the news also generally happen to large, public companies. In reality however, most lawsuits come from customers, vendors, suppliers and other third parties. These lawsuits are smaller, but far more frequent and can add additional reputational risk if not dealt with properly.

How to Save on D&O Insurance

There are some steps you can take to save on your total costs for D&O insurance. Outside of ensuring you only choose the policies you know you need, and taking combined coverages where applicable, two other things you can do is:

Pay your entire premium upfront.

You can choose to pay your premium in either monthly or annual installments. It might be tempting to choose the monthly payment, as it presents in a smaller amount. However, the smaller amount can add up to more. Pay for the full premium annually instead. Businesses tend to save a lot of money this way, specifically through all the discounts insurers will offer when you choose annual premiums.

Proactively manage your risks.

Businesses with low to no claims history will pay less. This is because agents identify such businesses as low risk. Hire a team to create a comprehensive risk management plan. If you have a medium to large scale operation, doing this can lower your insurance costs by half.

In Conclusion

The success or failure of a company is determined by the ability to handle unexpected losses. You want to protect all your resources in any event of unexpected loss. Directors and officers are arguably the most important resources to any company. That’s why every company needs a strong D&O Insurance plan.

Have we convinced you into getting D&O insurance for your company? Reach out to a local insurance agent today and find out the best rates for the coverage you need.

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